Sie sind auf Seite 1von 62

Supply Chain Metrics That Matter

A Focus on Household Products, and


Beauty Companies
A Ten Year View of Progress on Supply Chain Excellence

7/21/2016

By Lora Cecere
Founder and CEO
Supply Chain Insights LLC

By Regina Denman
Client Services Director
Supply Chain Insights LLC
Contents
Research 3
Disclosure 3
Research Methodology 3
Understanding the Data 4
A Complex System with Nonlinear Relationships 5
Driving Profitability 6
Improving Cycles 7
Managing Complexity 7
A Closer Look at Value 8
Driving Value 9
Supply Chain Index: A Measurement of Supply Chain Improvement 11
Balance 15
Strength 17
Resiliency 17
Evaluating Supply Chain Excellence: Putting It All Together 21
Executive Overview 23
The Race for Growth 24
What Is Value? 25
Judging Supply Chain Performance 27
Managing Cash-To-Cash Cycles 29
Industry Focus 32
Recommendations 50
Conclusion 51
Prior Reports in This Series 52
Methodology: Understanding the Math and Ratios 54
Supply Chain Index Methodology: Formulas and Calculations 55
Balance 55
Strength 55
Resiliency 56
A Closer Look at Inventory Turns: An Important Measurement 57
Corporate Overview Data 60
About Supply Chain Insights LLC 61
About Lora Cecere 61
Endnotes 62

Page 2
Research
Supply Chain Metrics That Matter is a series of industry-specific reports published throughout the
year by Supply Chain Insights LLC. The series starts in May when we can access full-year corporate
reporting for the prior year. Here we look at two industries within the Consumer Packaged Goods
(CPG) sector: Household Products, and Beauty companies.

This analysis is based on data collected from financial balance sheets and income statements over
the period of 2006-2015. In the report we analyze pre- and post-recessionary trends. The analysis
focuses on supply chains strategies: how companies made trade-offs over the course of the last
decade and delivered the best portfolio of supply chain metrics during that period.

Within the world of Supply Chain Management, each industry is unique. The pattern for CPG
companies is distinctly different than consumer electronics, medical device or a pharmaceutical
company. It is for this reason we believe it is dangerous to list all companies across many different
industries in a spreadsheet, compare the results, and declare a supply chain leader. Instead, we think
it is more prudent to evaluate change over time, with a focus on business results within an industry
peer group.

Disclosure
Your trust is important to us. As such, we are open and transparent about our financial relationships
and our research processes. This independent research is 100% funded by Supply Chain Insights.

These reports are intended for you to read, share and use to improve your supply chain decisions.
Please share this data freely within your company and across your industry. All we ask for in return is
attribution when you use the materials. We publish under the Creative Commons License Attribution-
Noncommercial-Share Alike 3.0 United States and you will find our citation policy here.

Research Methodology
Supply chain leaders are in a race to deliver supply chain excellence. They are competitive. The
questions by their board of directors are What defines excellence? and What defines value? Here,
in this report, we answer these questions. We believe that the best supply chains outperform similar
companies in their peer groups while driving improvement.

Performance is easier to measure than improvement. To build a method to measure improvement we


partnered with a research team from the School of Computing, Informatics and Decision Systems

Page 3
Engineering at Arizona State University (ASU) during the spring of 2014 to develop the Supply Chain
Index methodology to analyze supply chain improvement. Details on the math used in this
methodology are outlined in the Appendix of this report. We have refined this methodology over time.

Understanding the Data


In this analysis we use supply chain financial ratios as opposed to absolute numbers. The use of
ratios allows us to compare large companies to small entities, and also to compare the progress of
companies operating in different countries using differing currencies. Additionally, it allows us to
easily track progress over time. Our goal was to define an industry standard definition that could be
used by all manufacturing, distribution and retail companies.

Our first step was to determine which metrics to use. In Table 1 we share the supply chain ratios we
considered.

Table 1. Financial Ratios Considered in the Development of the Supply Chain Index

We find that most supply chain leaders measure too many Key Performance Indicators (KPIs). To
select the metrics in the analysis we mined trends and discussed them with supply chain leaders
through phone interviews. After two years of analysis we determined that the patterns and trade-offs

Page 4
between year-over-year Revenue Growth, Operating Margin, Inventory Turns and Return on Invested
Capital (ROIC) were the most helpful in the determination of performance and improvement. Since
these metrics also have a correlation to market capitalization, we term this portfolio of metrics as the
Supply Chain Metrics That Matter.

While there are other measurements which we believe are important in the determination of supply
chain excellencelike forecast accuracy, case fill rate, carbon footprint, and inventory write-offswe
cannot find a reliable and consistent source of data for these metrics that covers all industries and
years studied. This does not make these metrics less important, but without a consistent source of
data, we felt that we could not include them. In our research we found that the industry data sources
for these metrics are spotty and largely inaccurate due to the self-reporting of data. Without a
consistent data source across the industries we cannot include these factors even though we believe
they are important.

A Complex System with Nonlinear Relationships


The supply chain is a complex system with increasing complexity. A complex system has multiple
inputs and multiple outputs that are interrelated.

In the management of this system we believe it is the supply chain leaders role to build and manage
supply chain performance to drive year-over-year improvements which are balanced, strong and
resilient. In our research we see that supply chain improvement takes at least three years.

The journey has no guarantees. Often we see a company hitting a plateau and regressing. On the
journey we also see companies throwing the system out balance. As a result, we often see leaders
able to only drive progress on a single metric, not the entire metrics portfolio. A balanced metrics
portfolio has a higher correlation to value-based metrics of either market capitalization or Price to
Tangible Book Value (PTBV).

Our goal was to select a portfolio that would be meaningful across all industries. It is important to note
that the maximization of market capitalization requires the management of a balanced portfolio on the
effective frontier of growth, cost, cycles and complexity. We believe that supply chain leaders improve
a balanced portfolio of metrics.

We call this balanced portfolio of metrics The Supply Chain Effective Frontier1, seen in Figure 1.

1
Conquering the Supply Chain Effective Frontier, Supply Chain Insights, July 4, 2016,
http://supplychaininsights.com/?s=supply+chain+effective+frontier

Page 5
Figure 1. The Supply Chain Effective Frontier

In our writing it is deliberately not termed the Efficient Frontiera term used in economic theory.
Why? Quite simply it is because the term efficiency in supply chain processes is usually linked to the
lowest cost or the best revenue per employee. The concepts of the Effective Frontier are based on
the balance of growth agendas with cost, cycle metrics (a focus on inventory), and complexity. We
use Return on Invested Capital (ROIC) as a proxy for complexity.

Across all industries we find that nine out of ten companies are stalled at the intersection of two
important metrics, i.e. inventory turns and operating margin. While some companies made no
improvement over time, most companies were able to either improve inventory turns, or cost, but not
both together. The reasons? One of the reasons is unchecked complexity. The second is the focus on
functional metrics to the detriment of corporate performance. As will be seen in this report, unchecked
complexity throws the supply chain out of balance.

Driving Profitability
Across industries, there is an inverse relationship between margin and supply chain excellence.
Industries with the thinnest margins are more serious about delivering on the promise of supply chain
leadership. As a result, we see that the pharmaceutical and medical device industries have been
slower to adopt supply chain processes while the consumer electronics and chemical industry has
been more aggressive.

CPG companies, including Household Products and Beauty, are stuck in the middle. As a group they
are not pushing aggressively to drive new innovation, but they are far from being the industry
laggards. Slowly, over the course of the last decade, they adapted processes to embrace the rise of
e-commerce and the shift of power to the consumer. There were several process evolutions. This
shift is ongoing.

Page 6
Today with globalization, commodity price volatility, and an increase in regulatory compliance, there is
a renewed focus on building a strong supply chain. In our analysis for this report we use operating
margin as the measure of profitability. The methodology is equally applicable to EBITDA, but does not
work well using the metric of cost-of-goods-sold.

Improving Cycles
When it comes to managing cash-to-cash cycles, a small number is better than a large one. The
question in the boardroom is How small can supply chain working capital cycles be managed to
pump cash into the organization? There is seldom the question of How low can we go in working
capital cycles before we put the supply chain at risk? Cash-to-cash is a composite metric of days of
receivables, days of inventory, and days of payables. As can be seen through the charts, in most
industries the greatest improvement in supply chains in the last decade has been made in days of
payables: lengthening payment terms to suppliers. As will be seen in this report, inventory levels and
receivables have been more constant. Few companies in this industry made dramatic improvement in
cash-to-cash cycles. The exception is P&G.

In our analysis we use inventory turns as our measure of supply chain cycles. While companies want
a smaller number for days of inventory, they want to turn inventory faster. The higher the inventory
turn value, the stronger the results.

There are two primary ways to calculate inventory turns. (We detail the impact of the different
methodologies in the appendix.) In this report we measure inventory turns as:

Inventory Turns = Cost of Goods Sold/Inventory

Managing Complexity
By definition, the Household Products and Beauty industries are asset intensive. Smokestacks dot
the landscape, and manufacturing reliability is at the core of supply chain excellence. Most manage
their own factories with less than 15% of manufacturing is outsourced.

Within the Household Products and Beauty industry supply chains there are many forms of
complexity: increase in items, shifts in customer policies, product localization, geographic reach,
changes in manufacturing, serialization of items, and new product launch. In the last decade
complexity abounded. As complexity rises it is more and more difficult to drive asset effectiveness. In
this report, we profile this journey. In the periods studied, Colgate and Reckitt Benckiser drove higher
levels of asset utilization.

Page 7
While there are many measurements of asset effectiveness: Return on Assets (ROA), Return on Net
Assets (RONA) and Return on Invested Capital (ROIC), we use ROIC as a metric to analyze asset
utilization. Return on Invested Capital is a less well-known metric compared to Return on Assets.

The reasoning? Return on Assets has a narrower focus. Our research indicates that ROIC has a
better correlation with stock market capitalization, and provides a broad perspective on cash flow
generation and profitability based on shareholder equity. Companies with a singular focus on ROA
will throw the supply chain out of balance. The formula used for ROIC is:

ROIC is a measurement of the companys use of capital. The goal of the measurement is for the firm
to drive higher returns than the market rate of the cost of capital. However, used alone as a singular
metric it will retard growth. As will be seen in this report, for many companies, maintaining high levels
of ROIC is a struggle.

A Closer Look at Value


Traditionally the supply chain teams focus was a cost agenda. Increasingly the organization is asking
the supply chain team to focus on value. However, to guide this journey there has to be a clear
definition of value. There is no industry-standard definition.

To help, we started this undertaking with an analysis between supply chain performance and market
capitalization. In 2012 we calculated the correlation of seven years of financial ratios (based on
quarterly reporting) to market capitalization (the number of outstanding shares multiplied by the share
price) on a quarterly basis.

The results of this initial study on the correlation to market capitalization are presented in Table 2.

Page 8
Table 2. Correlation of Supply Chain Financial Ratios to Market Capitalization

Driving Value
Traditionally, the supply chain leader drove a cost-reduction agenda. Within the firm, 60-80% of total
costs are controlled by the supply chain team, and the management of total costs was essential to the
evolution of the firm. Each industry operates within a value chain, and each value network is driven by
market shifts. As a result, a singular focus on costs is not sufficient. Increasingly, companies are
asking supply chain leaders to focus on value. The question most have is What defines value? Here
we answer this question.

As the power in the channel shifted to the shopper, traditional consumer brands struggled to retain
market share. Retailers became competitors, offering their own brands. E-commerce redefined the
relationship with the consumer. The retailer brands of Costco, Safeway, Tesco, Trader Joes, and
Walmart built brand power. In 2016 Amazon is continuing this momentum by introducing its own
brands. In addition, consumer sentiment changed the course of this industry.

In these turbulent years supply chain excellence mattered more than ever. It was a period of change:
new business models, proliferation of items and increasing pressure to improve consumer product

Page 9
safety. Leaders in the CPG industries tried to offset margin pressures by improving labor productivity,
but to no avail. The relationships of the metrics for the industries within the consumer value chain are
depicted in Table 3. The first number in the table represents the average value for the period of 2006-
2015 while the second number shows the percentage change when the full year of 2006 is compared
to the full year period of 2015 (reflecting pre- and post-recessionary impacts for the reader).

Table 3. Summary of Supply Chain Metrics That Matter within the Consumer Value Chain for 2006-2015

So while the mass merchants grew at a 6% rate, Household Products companies struggled to deliver
a 4% growth rate over the period of 2006-2015. While retailers adopted new business models,
Household Products companies powered growth through global expansion. In the process they
fought to maintain the margins of 16%. When 2006 results (pre-recession) are compared to 2015 we
can see that within the industry the average margin fell while inventory turns declined. Companies
tried to reduce costs by driving improvements in employee productivity, and improve cash-to-cash by

Page 10
lengthening days of payables, but all industries lost value as measured by PTBV. The Beauty industry
performed slightly better with a drop in growth of 7%, a decrease in operating margins by 2% and an
increase in inventory turns of 2%, with an improvement in ROIC of 5%.

In this report we measure value by Price to Tangible Book. While market capitalization is often driven
by economic cycles we find Price to Tangible Book Value (PTBV) is a more disciplined look at value.

Price to Tangible Book Value is calculated by dividing the share price of a public company by its
tangible book value per share. For example, let's assume that Company XYZ has 10,000,000 shares
outstanding which are trading at $3 per share. Lets also assume that the same companys tangible
book value was $15,000,000 last year. The calculation would be:

Price to Tangible Book Value = $3 / ($15,000,000/10,000,000) = 2.0

The PTBV ratio excludes intangibles: intellectual property, patents, goodwill and other intangible
assets. It is a representation of what debtholders or investors would receive if the company liquidated
all physical assets. We feel this is a measure which supply chain leaders can impact. In this report we
use the metrics that have the highest correlation to market capitalization and also evaluate which
companies have driven the greatest improvement on Price to Tangible Book Value.

Supply Chain Index: A Measurement of Supply Chain


Improvement
The Supply Chain Index is the measurement of improvement used in this report2. This methodology
was defined by Supply Chain Insights in 2012. The foundation of the Supply Chain Index starts with
understanding the resulting pattern when two supply chain metrics (generally ratios) are plotted over
time on an orbit chart. As shown in Figures 2 and 3, the orbit chart enables the visualization of
performance patterns. In each figure, the best scenario is notated in the upper right-hand corner.

The Orbit Chart for Procter & Gamble (P&G) is shown in Figure 2. Known as a legacy supply chain
leader, the P&G team struggled to drive improvement after the Gillette acquisition. The average
values for the two financial ratios of operating margin and inventory turns are shown in the center
box, and the annual progress is shown as points on the chart. The line outlines the year-over-year
performance pattern. For the period, P&G had an average operating margin of 19% and operated
with 5.8 inventory turns. Since 2010, the company lost ground on operating margin.

2
The Supply Chain Index, Supply Chain Insights, July 4, 2016, http://supplychaininsights.com/the-supply-chain-index/

Page 11
Figure 2. Orbit Chart for P&G Showing Inventory Turns and Operating Margin for 2006-2015

While many companies accept P&G as the de facto supply chain leader in driving supply chain
improvement, we find that the company drove significant supply chain advantage up until 2010, but
then lost ground. Was it business complexity? The integration of the Gillette acquisition?
Complacency? Too much IT outsourcing? A change in leadership? An insular culture? We will never
know for sure. However, we do know from studying the patterns that it is hard for companies to
maintain year-over-year excellence against the peer group in periods of declining demand. For the
period of 2006-2015, all Household Products companies, with the exception of Church & Dwight,
Clorox, and Reckitt Benckiser, struggled to drive improvement.

In a similar pattern, demonstrated in Figure 3, Colgate lost margin while driving inventory
improvement. While the average margin of Colgate was higher for the period than P&Gs (21% as
compared to 19%), Colgate is operating at almost the same level of margin and inventory turns in
2015 that they were in 2006. While P&G drove innovation with technology vendors, Colgate clung to
IT standardization. Neither companys strategy was equal to overcome market dynamics to drive
supply chain improvement in the face of declining volumes and an increase in global complexity.

Page 12
Figure 3. Orbit Chart for Colgate Showing Inventory Turns and Operating Margin for 2006-2015

Figure 4. Orbit Chart for Church & Dwight Showing Inventory Turns and Operating Margin for 2006-2015

Page 13
In contrast, as shown in Figure 4, Church & Dwight drove supply chain improvement at this
intersection with a lower level of operating margin and a higher level of inventory turns. While most
companies accept P&G and Colgate as industry leaders, few would know that Church & Dwight drove
improvement while P&G and Colgate faltered. It is our goal to highlight the patterns and, through
interviews with the leaders, answer Why? Our goal is to gain insights which will help all supply chain
leaders.

The Beauty industry fared better. In Figure 5 we share a similar orbit chart for Este Lauder and
LOral. Note that both companies have driven improvement in operating margin and inventory turns.
Both companies are driving improvement; and as we will see in this report, performing at a better
level than their peer group. For both of these companies, via interviews, we feel that the most
important driver was leadership and focus.

Figure 5. Orbit Chart for Este Lauder and LOral Showing Operating Margin and Inventory Turns for 2006-2015

In the analysis of supply chain excellence, we first analyze the individual company patterns and then
compare the patterns of each company within its peer group. Note the patterns of a peer group
comparison in both Figure 5 for Beauty, and Figure 6 for Household Products. While the Beauty
companies are making progress, the Household Products leaders are going backwards.

Page 14
Figure 6. Orbit Chart for Kimberly Clark and P&G Showing Operating Margin and Inventory Turns for 2006-2015

Due to the complexity of the orbit charts and the patterns, our first challenge in the creation of a
methodology for The Supply Chains to Admire analysis was to define Supply Chain Improvement.
This was our goal in building the Supply Chain Index. We wanted to develop a means to analyze
improvement across a variety of industries, with applicability to an entire peer group. The analysis
enables comparison of companies with different levels of revenue, and at different levels of supply
chain maturity. With each chart we measure three factors--balance, strength and resilience in
performance metrics within a peer groupto gauge improvement in the metrics portfolio for the
Supply Chain Metrics That Matter.

Balance
Balance in the supply chain is a constant struggle. Growth requires an increase
in inventory. Forecasting and managing a new product launch is difficult.
Excessively long Days of Payables leads to weakened supplier health. The
examples are endless. The two metrics which comprise our balance measure
are Revenue Growth and Return on Invested Capital.

The balance measure in the Supply Chain Index is a mathematical calculation


of the vector trajectory of the pattern between growth and ROIC for the periods of 2006-2015 and

Page 15
2009-2015.To understand this measurement, imagine a four quadrant grid with growth and ROIC on
the two axes. In our calculation, the overall trajectory of this vector from Year 0 (2006) to Year 9
(2015) is simplified into a single value which represents the companys ability to balance growth while
improving ROIC.

Companies that were able to drive improvement in both metrics scored the best, while companies
that deteriorated in both metrics scored the worst. The companies are then stack ranked based on
factor ratings. In Figure 7 we profile Colgate at this important intersection. With the decline in growth,
Colgate pushed an asset intensive industry strategy.

Figure 7. Colgate Orbit Chart of Growth vs. Return on Invested Capital (ROIC) for 2006-2015

The balance factor comprises 1/3 of the total Supply Chain Index calculation. Sustained improvement
on both year-over-year growth and ROIC indicates a balanced supply chain and is reflected in a high
balance score.

Page 16
Strength
A successful supply chain is strong and reliable. Supply chain leaders strive to
deliver year-over-year improvements in both cost and inventory management.
Our research on pattern recognition has uncovered a rich relationship between
operating margin and inventory turns. For most supply chain leaders, these are
some of the most important measures of their performance. Not only are they
important, they are more directly influenced by day-to-day supply chain
decisions than other, and more broadly used, corporate metrics. It is for this reason they are the two
components of our strength factor in the Supply Chain Index.

The strength measure in the Supply Chain Index is a mathematical calculation of the vector trajectory
of the pattern between inventory turns and operating margin for the periods of 2006-2015 and 2010-
2015. Like the balance factor calculation, the work starts with understanding the orbit chart pattern.
To understand the calculation, imagine a plotan orbit chartof inventory turns and operating
margin. In this report, performance is graphed on an annual basis from an origination point
representing performance on the two metrics at Year 0. In the 2006-2015 Index analysis, the overall
trajectory of this vector from Year 0 (2006) to Year 9 (2015) is simplified into a single value which
represents strength. Improvement on both metrics simultaneously is graphically shown as movement
to the upper-right quadrant with increasing values for both inventory turns and operating margin over
the period. The strength ranking is 1/3 of the Supply Chain Index.

Resiliency
Resiliency is an adjective easily tossed around as one of the important qualities
of a successful supply chain in todays volatile world. However, the concept of
resiliency is difficult to define, and there is rarely clarity among stakeholders as
to what resiliency is or should be.

As we plotted orbit chart after orbit chart, we could see that some supply chains
had very tight patterns at the intersection of operating margin and inventory
turns, and that other companies had wild swings.

We wanted to find a way to measure the variation, so we turned to the experts at ASU. After
evaluating several methods to determine the pattern in the orbit chart, we settled upon the Euclidean
Mean Distance between the points.

Page 17
These results were published in our March 2014 report, Supply Chain Metrics That Matter: Improving
Supply Chain Resiliency, where we define resiliency as the tightness of the pattern at the intersection
of inventory turns and operating margin. (The calculation is outlined in the Appendix of this report.)
These metrics, both critical for any supply chain, are components of both the strength and resiliency
metrics in our Supply Chain Index model.

The Euclidean Mean Distance indicates the ability of a supply chain to maintain a tight, consistent
pattern across these two metrics as the business environment shifts and changes over a ten year
period (2006-2015). As shown in Table 4, supply chain resiliency varies considerably by industry. The
Consumer Packaged Goods industry is more resilient than co, but more volatile than consumer
packaged goods.

Table 4. Supply Chain Resiliency by Industry

The resiliency metric is similar to the cash-to-cash cycle in that a smaller number is better. A lower
number for resiliency is an indicator of a tighter pattern, and greater reliability in results over the time
period. To drive resiliency requires a focus on the customer, an empowerment of the workforce, and a
focus on the Supply Chain Metrics That Matter. Process excellence needs to be aligned on corporate
outcomes, which is challenging for a traditional functionally-siloed organization.

Page 18
Calculating the Supply Chain Index
After the three factors are calculated, we then ask the question, Did the supply chain drive
improvement higher than the peer group average for the period of 2006-2015? To calculate
improvement, we use the Supply Chain Index as a measurement. Each of the factorsbalance,
strength and resiliencyas defined above, comprises 1/3 of the total score.

As you will see in the analysis, companies like Colgate, Kimberly-Clark, P&G and Unilever do not
make this first cut.

The Supply Chain Index results for Household Products and Beauty companies are shown in Tables
5 and 6.

Table 5. Supply Chain Index - Household Products Companies for 2006-2009, 2010-2015 and 2006-2015

Based on the relative level of peer improvement, Tupperware, Church & Dwight, Newell Rubbermaid,
Reckitt Benckiser Group, PLC, and The Clorox Company meet the criteria of relative supply chain
improvement against the peer group for the period of 2006-2015 to qualify for the Supply Chains to
Admire award. Note Unilever, highly touted by many consultants, ranks last in driving supply chain
improvement for the period of 2006-2015 and a number five placement out of nine companies in the

Page 19
more recent period of 2010-2105. The company has driven improvement in pockets or regions of
the supply chain, but not in the balance sheet holistically.

Based on the relative level of peer improvement, Elizabeth Arden, Este Lauder, and LOral meet
the criteria of relative supply chain improvement against the peer group for the period of 2006-2015 to
qualify for the Supply Chains to Admire award.

In Table 6, we share the Supply Chain Index, or relative improvement, for the supply chains serving
the Beauty industry.

Table 6. Supply Chain Index Beauty Companies for s 2006-2009, 2010-2015 and 2006-2015

Companies that are underperforming their peer group can drive supply chain improvement faster than
higher-performing companies. It is analogous to the story on the TV Show The Biggest Loser. The
company with the most fat or opportunity will make improvement the fastest whereas a strong
supply chain performer, like Colgate, will hit a plateau and fail to drive improvement at the level of the
peer group. As a result, for the Supply Chains to Admire analysis, we take companies in the upper
2/3 of their peer group on improvement while disqualifying the lower 1/3 from the competition.

We feel strongly that when evaluating supply chain excellence, it is important to look at improvement
and performance together. We use this analysis to determine the best performing supply chains
through our Supply Chains to Admire methodology. In this report, we share the details.

Page 20
Evaluating Supply Chain Excellence:
Putting It All Together
In the overall analysis for the Supply Chains to Admire, each company is judged by their own
potential to make progress. While the average values of a
companys performance may be higher, in the Supply Chain
Index we are evaluating companies on their ability to drive
year-over-year improvement and reliable progress on the
metrics that we believe matter.

The companies that are above the industry peer group on this balanced portfolio, and have driven
supply chain improvement, are given a Supply Chains to Admire award. This recognition award is
now in its third year. The 2016 winners are shown in Figure 8.

Figure 8. 2016 Supply Chains to Admire Award Winners

Page 21
To meet the criteria for The Supply Chains to Admire for 2016, companies needed to score better
than their peer group average for performance metrics, while driving a higher level of improvement
than 2/3 of their industry peer group.

The calculation process is:

Supply Chain Index. The Supply Chain Index is calculated for the peer group. A ranking in the top
2/3 of the peer group qualifies a company for further analysis. A company in the lower 1/3 for the
period is eliminated from consideration.
Price to Tangible Book Value. This analysis determines which companies are driving the greatest
value. We first throw out the outliers in the (PTBV)i calculation. After the elimination of outliers, we
include companies that are at or above the PTBV value (allowing for no more than 5% below the
mean for the peer group to account for rounding errors).

Companies passing these two tests are then analyzed against the performance factors for 2009-
2015:

Growth. Higher percentage growth than the industry average.


Operating Margin. Greater margin performance than the industry average for the peer group for
the period studied.
Inventory Turns. Better performance in inventory turns than the peer group average for the period
studied.
Return on Invested Capital (ROIC). Higher performance on ROIC than the average for their peer
group for the period.

In the analysis of the performance factors, companies are divided into two classifications:

Supply Chains to Admire Winners: In the analysis of the performance factors of growth, operating
margin, inventory turns, and Return on Invested Capital, companies scoring at or above the industry
peer group average for all four of the factors are listed as Supply Chains to Admire winners. (Must
be within 5% of the mean of the peer group to account for rounding.)
Supply Chains to Admire Finalists. Companies meeting the Supply Chain Index and the PTBV
criteria, but falling below the peer group averages on the performance factors, are ranked as
finalists if they are no more than 10% below the industry average for three out of four of the
performance factors, and no more than 25% below on any single performance factor.

After doing this comparative analysis of the performance factors, we form a short list of companies.
The methodology is not limited to the best company in the peer group. Within a peer group, there can
be multiple winners.

Page 22
Executive Overview
Consumer Packaged Goods supply chains serve global markets. Growth agendas dominated supply
chain strategies. Pressure on companies to reduce cash flow, and to improve working capital to
invest in growth, drove a focus on improving inventory turns. Heavy M&A activity and product
proliferation resulted in an increase in items by 32% since 2010. Product complexity grew faster than
growth as average sales per item dropped 22%3. This increase in complexity lengthened the long tail
of the supply chain, adversely impacting cost, and Return in Invested Capital (ROIC).

Within the Household Products and Beauty industries, companies are stuck on the critical metrics that
drive value. In the post-recession years of 2009-2015 most regressed in delivering improvement on
the Supply Chain Metrics That Matter. For many supply chain leaders who attend industry
conferences this may seem unfathomable. There is a pervasive industry belief that Household
Products and Beauty companies implemented new technologies, and evolved processes to drive
improved balance sheet results. As will be shown in this report, most companies regressed.

Why did this happen? The rate of market change was slow, but impactful. It is a story of death by a
thousand cuts. As power shifted to the consumer, the Household Products and Beauty organizations
drove continuous improvement programs to fund growth versus redesigning outside-in. In the face of
subtle change, no company in the peer group effectively redesigned supply chain processes to use
retail or channel data to build demand-driven processes. Similarly, the industry was slow to adopt
new business models like e-commerce and drive growth through alternate retail formats. Throughout
the decade the focus was on functional efficiency: traditional marketing program effectiveness while
the supply chain group attempted to drive efficiency gains, labor reductions, and reduce costs. The
alignment gaps between commercial and operational teams are higher than what we see in other
industry peer groups. As a result, in this period no company effectively managed complexity. As a
result, growth slowed, costs increased, and asset effectiveness worsened.

This is in sharp contrast to an industry like consumer electronics where the market thrusts and
changes were swift and direct. To survive, consumer electronics companies adopted new processes
and technologies at a quicker rate than those in the Household Products and Beauty industries. Here
we share these insights.

3
Terra Technology Benchmarking Study, 2015, https://www.terratechnology.com/key-findings/, 6/11/2015

Page 23
Who Did the Best?
When it comes to supply chain excellence, supply chain leaders argue on which companies perform
the best. The debate rages. Based on conversations at conferences and public opinion, Colgate,
P&G, and Unilever are frequently positioned as best-in-class supply chain leaders. In the Supply
Chains to Admire analysis, we find that these traditional supply chain leaders led in the period of
1995-2005, but fell behind in the period of 2006-2015. The reason was a combination of factors.

This analysis highlights the performance of new supply chain leaders.

Clorox and LOreal are winners of Supply Chains to Admire awards for 2016, while Este Lauder is a
finalist. The stories of success have commonalities. Both focused on improving customer
segmentation, and tailoring the supply chain response based on cost-to-serve. Each company
managed item complexity and customer requests through refining cross-functional processes.

The Race for Growth


Household Products companies grew faster early in the decade than in the post-recession years. The
overall average growth for the Household Products industry for the period of 2006-2015 is 4%, but the
growth is a negative 1% for the last three years. Growth, while highly desirable, is elusive. Year-over-
year growth rates of the two sectors are shown in Tables 7 and 8.

Table 7. Household Products Industry Growth Rates with a Comparison to the Supply Chain Index

Page 24
For the Beauty industry, as seen in Table 8, the 2006-2015 growth rate is 3%, but the growth rate
sharply dropped in the last three years to -4%. In the peer group, only Este Lauder has both the
highest growth rate and the highest rate of improvement.

As volumes decline, the redesign of the supply chain is paramount. This is especially true with the
decrease in volume is also accompanied by an increase in complexity.

Table 8. Beauty Industry Growth Rates over the Last Decade with a Comparison to the Supply Chain Index

What Is Value?
Companies want to improve value; but in the industry, there is no standard definition. In this series of
reports, we are trying to define a methodology to help the supply chain leader shift from a focus on
costs to drive value for shareholders.

In this report, we use Price to Tangible Book Value (PTBV) as the proxy metric for value. As noted in
Tables 9 and 10, over the period of 2006-2015. PTBV decreased in the Household Products industry
and increased in the Beauty industry.

Page 25
Table 9. Household Products Industry Comparison of Market Cap, Price to Book, & Price to Tangible Book Value

Table 10. Beauty Industry Comparison of Market Capitalization, Price to Book, & Price to Tangible Book Value

Page 26
Judging Supply Chain Performance
When it comes to overall supply chain performance industry averages, Tables 11 and 12 show the
performance and improvement trends of the industry. As growth slowed, operating margin declined
while inventory turns and Return on Invested Capital (ROIC) improved. Household Products focused
on improving on working capital.

Growth. With the slowing of growth, supply chain core competencies matter more than ever.
Driving growth through globalization increased complexity, and required greater supply chain core
competency. To try to stimulate growth, household products increased SG&A to manage channel
complexity.
Inventory Turns. With the strong focus on working capital many companies invested in inventory
processes and technologies, with a slight improvement in inventory. With the rise in complexity,
inventories are the most important supply chain buffer for this industry. Most companies focused on
safety stock, whereas leaders defined buffers and inventory strategies (definition of form and
function of inventory using advanced analytics).Overall, the industry sectors improved inventory
slightly.
Operating Margin. Companies fought through volatile times to protect margins. They were not
successful. Despite a focus on a cost-based agenda, average operating margins declined.
Asset Utilization. While ROIC performance improved in the industry, companies struggled to
balance inventory and operating margins with asset utilization.

Page 27
Table 11. Performance and Improvement - Household Products Group During 2009-2015, 2011-2015 & 2006-2015

Table 12. Performance and Improvement - Beauty Group During 2009-2015, 2011-2015 & 2006-2015

Page 28
Managing Cash-To-Cash Cycles
When it comes to managing cash-to-cash cycles, a small number is better. The question in the
boardroom is How small can supply chain cash-to-cash cycles be managed before we put the supply
chain at risk? Supplier viability is an issue in the industry and retailers are increasing receivables.

Cash-to-Cash is a composite metric of days of receivables, days of inventory, and days of payables.

Cash-to-Cash Cycle= Days of Receivables + Days of Inventory- Days of Payables

As can be seen in Tables 13 and 14, the Household Products and the Beauty industries have very
different cash-to-cash cycles. Household Products companies operate at 2 to 3 times less working
capital. While Household Products improved cash-to-cash by 8%, cash-to-cash cycles increased in
the Beauty industry by 19%.

To understand why, each element requires a closer inspection. In the last decade receivables and
inventory grew in both industries. Payables increased an average of 10 days in the Household
Products industry and declined slightly in the Beauty industry.

Table 13. Comparison of Cash-To-Cash Components: Household Products Industry - 2006-2010 and 2011-2015

Table 14. Comparison of Cash-To-Cash Components: Beauty Industry During 2006-2010 and 2011-2015

The most improvement in cash-to-cash occurred in four companies. Kimberly-Clark decreased


working capital in the two periods by 30 days, while P&G degraded cash-to-cash by 17 days. In
contrast, cash-to-cash at Reckitt Benckiser increased 30 days. LOral decreased cash-to-cash by 50
days. In 2010 Unilever stopped reporting Days of Receivables and Days of Inventory.

Page 29
Figure 9. Cash-To-Cash Cycles for Major Household Products Companies for the Period 2006-2010

Figure 10. Cash-To-Cash Cycles for Major Beauty Companies for the Period 2006-2010

Page 30
Figure 11. Cash-To-Cash Cycles for Major Household Products Companies for the Period of 2011-2015

Figure 12. Cash-To-Cash Cycles for Major Beauty Companies for the Period of 2011-2015

Page 31
We find that the supply chain leaders who are making the most progress on the Effective Frontier,
and have the tightest resiliency on orbit charts (at the intersection of inventory turns and operating
margins), usually have payables in the 30-60 day range. LOrals payables at 187 and Reckitt
Benckisers at 117 are extreme.

Industry Focus
Over the past decade the Household Products and Beauty industries transitioned through multiple
mergers and acquisitions, increased regulatory compliance, fought commodity price increases, and
raced to drive growth through globalization. Most companies focused on funding growth through the
administration of continuous improvement programs. What most companies did not realize was the
need to redefine the supply chain outside-in for a new consumer and channel relationships.

Annual report write-ups reflect the essence of programs for the years studied. In this section we give
context to the financial data by sharing relevant quotes from the annual reports of 2010-2015 from
Household Products and Beauty company leaders. As you read the quotes, note the difference in
perspectives and voice of the companies leaders. While Colgate focused on labor efficiency, Clorox
and Church & Dwight focused on using improved cash flow to fund growth. While Unilever redefined
supply chain strategies to improve Corporate Social Responsibility impact. Este Lauder attempted to
redefine the supply chain to better perform in new channels.

2010
Clorox. We continued to build on our history of strong cash flow, a Clorox hallmark, with an increase of 11
percent in cash provided by operations. We used our cash flow to pay down debt to targeted levels, increase
our dividend by 10 percent, repurchase 2.4 million shares of Clorox stock and purchase Caltech Industries to
further expand our Away From Home business.4

With our value-added Category Advisory Services (CAS), we share what we know about shoppers to help
retail customers become more profitable in our categories. Over the past several years, this sophisticated
capability has helped us establish ourselves as a true partner to U.S. retailers .5

Across categories, we search relentlessly for insights and solutions to solve problems for our consumers, help
grow our customers categories and drive economic profit for the company. Were generating ideas faster and
more consistently by incorporating more outside ideas than ever before. This year, we teamed with external
partners to help us solicit and filter ideas from inventors, and we held a contest to find new ideas for homecare

4
Clorox 2010 Annual Report, August 2010, p.7, https://www.thecloroxcompany.com/downloads/annual-reports/ar10_complete.pdf, accessed June 15, 2016.
5
Clorox 2010 Annual Report, August 2010, p.14, https://www.thecloroxcompany.com/downloads/annual-reports/ar10_complete.pdf, accessed June 15, 2016.

Page 32
products. All of this activity is accelerating our innovation pipeline of new product ideas. 6

Church & Dwight. Our annual free cash flow has increased by $300 million over the past 10 years. This
reflects an amazing job by our financial and supply chain teams in managing our working capital. The end
result is that our Free Cash Flow Conversion is the best in the entire consumer packaged goods industry.

Our Company has an enviable track record in making accretive acquisitions. We have very clear acquisition
guidelines and we quickly integrate the acquisitions to leverage our existing capital base in manufacturing,
logistics and purchasing. Over the past 10 years, we have acquired 7 of our 8 current Power Brands. 7

Colgate. Colgates growth is sparked by the innovative products we bring to market in our key product
categories, and we continue to be very focused on making sure we have innovation at all price points. This
strategy offers consumers a choice of products from entry level to super premium and allows them the
opportunity to trade up as disposable income levels rise. More than ever before, our nine consumer innovation
centers, which are located close to consumers in different parts of the world, are focused on developing
insight-driven innovation. These centers are staffed with marketing and consumer insight professionals, who
identify opportunities based on insights into consumer behavior, habits and desires, including local
preferences. Such work led to the introduction in Europe of Palmolive Authentics liquid hand soap containing
Mediterranean-inspired fragrances and ingredients. Another important element of our innovation strategy is
how we make use of external partnerships to complement our strong internal capability. We have many such
partnerships with a broad array of suppliers, research institutions, universities and other industry sources. 8

Another way Colgate connects with todays consumers globally is by utilizing integrated marketing
communications that include a mix of traditional and non-traditional media. The launch of Colgate Sensitive
Pro-Relief toothpaste leveraged multiple digital touch points, including informative product web sites and online
media featuring powerful consumer testimonials. These activities, combined with more traditional media and
promotional events, are contributing to market share gains worldwide.9

Reinforcing the importance of customer service, Colgate has created an innovative, activity-based training
course that focuses on the key role that supply chain collaboration plays in delivering against customer
expectations. Participants, who include customer development, customer service and supply chain personnel,
learn through team exercises how to address supply chain and other commercial challenges and still deliver
best-in-class service to Colgates retail partners at the lowest cost.10

6
Clorox 2010 Annual Report, August 2010, p.16, https://www.thecloroxcompany.com/downloads/annual-reports/ar10_complete.pdf, accessed June 15, 2016.

7
Church & Dwight Co., Inc. 2010 Annual Report, December 2010, p. 3, http://investor.churchdwight.com/phoenix.zhtml?c=110737&p=irol-reportsannual, accessed
June 15, 2016.
8
Colgate 2010 Annual Report, April 2011, p.5, http://www.colgate.com/Colgate/US/Corp_v2/Annual-
Reports/2010/HomePage/ColgatePalmolive2010AnnualReport.pdf, accessed June 15, 2016.
9
Colgate 2010 Annual Report, April 2011, p.8, http://www.colgate.com/Colgate/US/Corp_v2/Annual-
Reports/2010/HomePage/ColgatePalmolive2010AnnualReport.pdf, accessed June 15, 2016.

10
Colgate 2010 Annual Report, April 2011, p.12, http://www.colgate.com/Colgate/US/Corp_v2/Annual-

Page 33
Innovation at Colgate continues to be a key driver of profitable growth worldwide. Insights into consumer
behavior and research that identifies unfulfilled consumer wants and needs guide Colgates consumer
innovation centers as they develop the next generation of new products. For example, an insight that taking a
shower is one of the most pleasurable experiences for women each day led to the launch of Palmolive
NutraFruit, a line of shower gels with moisturizing cream and fruit fragrances. Supported by an integrated
marketing campaign themed so pleasurable, its addictive, Palmolive NutraFruit shower gel is driving market
share gains throughout Europe and the South Pacific.11

Colgates focus on efficiency is a key driver for generating funds to invest in new product development and
marketing activities, while still delivering strong profitability. One way Colgate is generating significant savings
is through business simplification, reducing the number of formulas, packaging, ingredients and sizes of our
products. One example is dishwashing liquid, which has been re-launched across Europe using just one cost-
efficient, environmentally friendly bottle design for six different Colgate brands. In total, the number of bottles
used in the category in Europe was reduced from 21 to 14. In North America, the Company introduced a more
concentrated dishwashing liquid formula and also reduced the number of bottle sizes used, resulting in
significant savings.

A new process technology in Brazil is allowing Colgate to save more than $2 million annually on purchases of
tallow, a key ingredient in bar soap production. Instead of buying high quality tallow available only from a
limited number of suppliers, Colgate developed the ability and capacity in-house to upgrade more widely
available lower-cost tallow. As a result, Colgates high quality standards are maintained at a reduced cost. The
process has been so successful, it is being considered by other geographies, as well as being explored for
other ingredients.12

Este Lauder. Communicating with consumers is changing as rapidly as the technology which enables it.
Today, communities are no longer defined by proximity to others. Conversations happen 24/7 across a variety
of platforms and geographies and consumers have become the voices of our brands. We are strengthening
our skills so that we lead not only in traditional e-commerce but across all forms of social and digital media to
better understand, engage and serve our consumers.13

We improved alignment throughout the organization and made great headway toward becoming a better-
integrated, global company with a common strategic focus. The successes of the past year confirm that our
strategy is strong and that by continuing to follow its principles we are poised to sustain and grow our
leadership in global prestige beauty. As a key part of our strategy, we strengthened and streamlined our

Reports/2010/HomePage/ColgatePalmolive2010AnnualReport.pdf, accessed June 15, 2016.


11
Colgate 2010 Annual Report, April 2011, p.14, http://www.colgate.com/Colgate/US/Corp_v2/Annual-
Reports/2010/HomePage/ColgatePalmolive2010AnnualReport.pdf, accessed June 15, 2016.
12
Colgate 2010 Annual Report, April 2011, p.16, http://www.colgate.com/Colgate/US/Corp_v2/Annual-
Reports/2010/HomePage/ColgatePalmolive2010AnnualReport.pdf, accessed June 15, 2016.

13
Este Lauder 2010 Annual Report, June 2010, p.12, http://media.corporate-ir.net/media_files/irol/10/109458/2010AR/ELC-AnnualReport2010-
web/TheEsteLauderCompaniesInc_2010_AR.pdf, accessed June 15, 2016.

Page 34
organization in phases by redesigning brand clusters, improving regional capabilities, designating and
enhancing multi-functional leadership teams and clarifying processes, roles and decision rights. The result? An
organization that is more informed, more agile and has a greater ability to adapt to, and win in, a changing
beauty landscape.14

More than ever, beauty conversations are increasingly taking place digitally. Over the past three years,
average monthly visits in the U.S. to beauty-related websites topped 60 million and grew 94 percent. The
digital space offers the perfect opportunity for translating and sharing in the emotional connections that fans
have to our products and services. While high-touch has always meant listening closely to our consumers, the
digital space provides us with real-time insights and the ability to engage in dialogue with our various
communities of consumers, as they are happening. At the Este Lauder companies, we know that in order to
remain the leader in global prestige beauty, we must keep pace with our digitally savvy consumers, embracing
their desire to be actively and interactively engaged with our brands.15

As we look toward the future, the Este Lauder companies will continue to innovate new ways of engaging our
consumers in the digital space where we expect some of the strongest growth. From Facebook to iPads,
Twitter to the blogosphere, we have exponentially expanded and improved our online capabilities and will
continue to invest in digital social media.16

To help drive down costs and improve integration, our Company created a Program Management Team (PMT)
that provides the structure and processes needed to implement a number of programs that resulted in
increased efficiencies and savings. In fact, under the umbrella of the PMT, we achieved over $350 million in
savings in fiscal 2010. We made difficult, but sizeable reductions in our resources through restructuring our
organization, reducing the cost of goods and leveraging scale across brands and geographies. We empowered
our supply chain teams to work collaboratively with our brand teams, joining forces both before and after
launches to bring more products to market in more efficient manners. We reduced the number of skus by ten
percent, enabling us to better leverage our assets while managing our business with reduced inventory. To
improve demand planning, inventory management, decision-making, speed to market and tracking of goods,
we advanced our Strategic Modernization Initiative (SMI) by implementing SAP, an enterprise-wide information
system, at nine of our North American manufacturing sites. We continue to gain important knowledge, which
we will apply to our next phase as we roll out SMI in multiple affiliate markets and regions. To date, we have
successfully moved more than 80 percent of our in-house production onto SAP. We have also continued to
develop our sales, inventory and Operations Planning program a structured process that combines sales
demands with operation capabilities in an effort to yield plans that better serve our customers and consumers.
At the same time, we identified capability gaps within our organization and invested available funds in those
14
Este Lauder 2010 Annual Report, June 2010, p.10, http://media.corporate-ir.net/media_files/irol/10/109458/2010AR/ELC-AnnualReport2010-
web/TheEsteLauderCompaniesInc_2010_AR.pdf, accessed June 15, 2016.
15
Este Lauder 2010 Annual Report, June 2010, p.39, http://media.corporate-ir.net/media_files/irol/10/109458/2010AR/ELC-AnnualReport2010-
web/TheEsteLauderCompaniesInc_2010_AR.pdf, accessed June 15, 2016.
16
Este Lauder 2010 Annual Report, June 2010, p.41, http://media.corporate-ir.net/media_files/irol/10/109458/2010AR/ELC-AnnualReport2010-
web/TheEsteLauderCompaniesInc_2010_AR.pdf, accessed June 15, 2016.

Page 35
areas. We reinvested a portion of our savings in strengthening our existing capabilities and focusing on
business-building activities like television advertising. As a result, we believe we are better equipped to
recognize and capitalize on the greatest opportunities for us in every market.17

LOral. The various Operations activities are already in battle formation to achieve this aim, and are ready to
play their part at three levels: optimizing industrial and supply chain costs, controlling risks and contributing to
value creation. Considerable progress has already been made towards the first objective, as we have seen.
For the second, we are responding by applying a single, solid industrial policy all over the world, which is
subjected to regular audits on all aspects, and by developing our own manufacturing capacities in advance of
the early stages. We are also responding to this objective by establishing regional databases of suppliers,
selected by a highly exacting screening process, covering all aspects of their performance and their social and
environmental responsibilities. Finally, Operations contribute to value creation, by active involvement in the
accessible innovation strategy, through the technical development of faster launches, better adapted to the
real needs of consumers in each market. This is what we are putting in place with prospective packaging units
in each zone, new industrial processes and by applying a policy of open cooperation with our regional
suppliers in the field of innovation and sourcing.18

In 2010, the global projects launched in 2009 to optimize the groups operational activities (including the supply
chain, purchasing and finance) continued, alongside the technical architecture rationalization program. 2010
provided the Information systems teams with an opportunity to accelerate the development of e-commerce
platforms for all the brands.19

P&G. We continuously review business results and strategic choices. Our Global Leadership Council is
actively involvedfrom understanding strategies to reviewing key initiatives, financial performance and control
assessments. The intent is to ensure we remain objective, identify potential issues, continuously challenge
each other and ensure recognition and rewards are appropriately aligned with results. 20

Unilever. Small improvements every day, the length and breadth of our supply chain, are enabling us to
increase speed, raise quality and leverage scale. The move to a global supply chain organization has improved
responsiveness and brought costs more into line with competitive levels. The successful launch last year of our
global shared services organization, Enterprise Support, is also helping us to drive cost and other efficiencies
through the whole organization. These elements of our program of continuous improvement are generating the
fuel for growth.21

17
Este Lauder 2010 Annual Report, June 2010, p.45, http://media.corporate-ir.net/media_files/irol/10/109458/2010AR/ELC-AnnualReport2010-
web/TheEsteLauderCompaniesInc_2010_AR.pdf, accessed June 15, 2016.
18
LOral 2010 Annual Report, April 2011, p. 74, http://www.loreal-finance.com/_docs/us/2010-annual-report/LOREAL-2010-AR-volume1DEF.pdf, accessed June 15,
2016.
19
LOral 2010 Annual Report, April 2011, p. 79, http://www.loreal-finance.com/_docs/us/2010-annual-report/LOREAL-2010-AR-volume1DEF.pdf, accessed June 15,
2016.
20
Proctor & Gamble 2010 Annual Report, August 2010, p. 28,
http://www.pginvestor.com/Cache/1001174635.PDF?O=PDF&T=&Y=&D=&FID=1001174635&iid=4004124, accessed June 15 2016.
21
Unilever 2010 Annual Report, December 2010, p. 7, https://www.unilever.com/Images/unilever-ar10_tcm244-421849_en.pdf, accessed June 15, 2016.

Page 36
Winning in consumer goods requires a continuous improvement philosophy a little better every day. Our goal
is to be faster and simpler and translate efficiency into more competitive costs. We are prioritizing speed and
flexibility in the supply chain to deliver growth. We a re-leveraging our scale more aggressively, especially in
support services and we are working to get a better return on our advertising and promotional expenditure
one of our most significant areas of cost.

Continuous improvement means doing everything a little better, every day. It is the key to sustainable growth.
In 2010, we concentrated on improving speed and agility in the supply chain, while keeping costs competitive.

Fast and flexible and increasingly competitive being competitive on cost is vital. But our customers needs
are constantly changing and our markets are fast-moving so we also need to be fast and flexible along our
whole supply chain, from the field to the shelf.

In 2010, our philosophy of continuous improvement was expressed through simplifying the supply chain,
superior service and quality.

Our move to a single global procurement strategy has brought significant benefits. We have achieved
significant savings in indirect spend. Success like this gets noticed Unilevers Marc Engel was named Chief
Procurement Officer of the year at the International Supply Management Congress. A phased global supply
chain change program gives an idea of the scope and pace of improvement. Rolled out first across Europe and
Asia, we launched the program in the Americas in April 2010 to create a new business unit, the Unilever
Americas Supply Chain Company, which will become operational in late 2011.

Bringing together common systems and processes across all Unilevers supply chain operations, this will
deliver even better service to our customers and consumers around the world.22

2011
Clorox. Relentless focus on innovation across the organization is one of the common threads in delivering on
our four key strategic commitments:

Win With Superior Capabilities in the 3Ds: Desire, Decide and Delight Clorox has a leading portfolio of
brands that are No. 1 or No. 2 in their categories. In fiscal 2011, we continued to execute with excellence
across our 3D demand-creation model, shown by the increased market share of our brands.23

Colgate. With Driving Global Growth as our theme, our focus was on what it takes to accelerate growth and
stay ahead of the competition. While we expect to face new challenges, we also see new opportunities. Our
proven strategy, which has led to consistent success around the world, will continue to drive our worldwide

22 22
Unilever 2010 Annual Report, December 2010, p. 7, https://www.unilever.com/Images/unilever-ar10_tcm244-421849_en.pdf, accessed June 15, 2016.

23
Clorox 2011 Annual Report, August 2011, p.3, http://files.shareholder.com/downloads/CL/2155187601x0x554796/ff62339e-5dd9-42d1-ab13-
de5f44e5f59f/Colgate_2011_AR_Web_Ready.pdf, accessed June 15, 2016.

Page 37
efforts. However, we have refined our four strategic initiatives so that we can operate smarter and faster,
continuing to build on our global strength. Colgate people worldwide are sharply focused on: (1) Engaging to
Build Our Brands, (2) Innovation for Growth, (3) Effectiveness and Efficiency, and (4) Leading to Win.24

Integral to Colgates global strategy is the ability to generate funds to invest in business growth. Through both
established efficiency programs applied to all aspects of our business and ongoing identification of new ways
to find savings, the Company constantly strives to improve its organizational capabilities and speed, while
reducing costs. Programs are wide-ranging and include many small initiatives amounting to millions of dollars
in savings that fund new product development and marketing activities, as well as helping to deliver strong
profitability.25

Este Lauder. Last year, we acquired the Hollywood photo studio-inspired brand, Smashbox. I am happy to
report that for the last year we have been successfully integrating the brand into our organization and have
planned an exciting re-launch to consumers in the fall of 2011. In addition, we recently acquired the fragrance
license for the luxury Italian brand, Ermenegildo Zegna, which is one of the fastest growing mens luxury
brands in China. We look forward to growing the brand and expanding its global business. 26

Over the past few years, we have been able to better align our organization with our strategy by transforming
how we utilize and leverage our people, processes and technology through our Strategic Modernization
Initiative (SMI). SMI addresses the need for more sustainable operations and has continued to deliver new
processes and technology

infrastructure to support our corporate strategy. We also continue to deepen our commitment to driving out
non-value-added costs to increase our investments in activities with the biggest returns. In fiscal 2011, we
worked tirelessly across the organization to reduce expenses and achieved a total cost savings of
approximately $200 million. We also tightened the relationship between our Global Supply Chain and our
brand teams early on in the innovation and research and development process. With these functions more
closely collaborating with our brands, we are able to better utilize our intellectual property and boost our ability
to translate good ideas into great concepts, and great concepts into successful market opportunities.27

LOral. The group is also accelerating the regionalization of its industrial facilities. Opened in 2010, the
Kaluga factory, in Russia is stepping up its output. To keep up with the strong growth in the Asia, Pacific zone,
extensions are under way in most of the Asian plants. All of them are consistently registering productivity gains
of around +20% year after year. Finally, 2011 saw construction begin on three new sites: San Luis de Potos in

24
Colgate 2011 Annual Report, April 2012, p.4, http://files.shareholder.com/downloads/CL/2155187601x0x554796/ff62339e-5dd9-42d1-ab13-
de5f44e5f59f/Colgate_2011_AR_Web_Ready.pdf, accessed June 15, 2016.
25
Colgate 2011 Annual Report, April 2012, p.16 http://files.shareholder.com/downloads/CL/2155187601x0x554796/ff62339e-5dd9-42d1-ab13-
de5f44e5f59f/Colgate_2011_AR_Web_Ready.pdf, accessed June 15, 2016.
26
Este Lauder 2011 Annual Report , June 2011, p. 3, http://media.corporate-ir.net/media_files/irol/10/109458/EsteLauder2011AR.lr150dpi.pdf, accessed June 15,
2016.
27
Este Lauder2011 Annual Report, June 2011, p. 59, http://media.corporate-ir.net/media_files/irol/10/109458/EsteLauder2011AR.lr150dpi.pdf, accessed June 15,
2016

Page 38
Mexico, set to become the groups largest hair colourant plant; in Indonesia, a hair-care and skincare factory
due to come on stream in the first quarter of 2012; and in Egypt a hair care and colourant factory to supply the
Middle East & North Africa.28

P&G. Our third major productivity effort is dramatically increased use of digital technology. Our intention is to
make P&G the most technology-enabled company in the world. We are achieving this by focusing on four key
areas: We want to enable one-on-one relationships with customers and consumers around the world; we are
focused on harnessing the power of real-time business intelligence to aid decision making; we are accelerating
innovation by using digital technology to create visibility from molecule-creation to the store shelf; and we are
standardizing best-in-class systems to integrate data.

Digitizing P&G will enable us to manage the business in real time and on a demand-driven basis. Well be able
to collaborate more effectively and efficiently, inside and outside the Company. And well interact with
consumers, retail partners and others far more directly and frequently than we can do today.

Were already seeing the benefits of digitization. We are increasingly making business decisions faster and
more collaboratively with real-time data. Were using virtual reality technologies to reduce cost and increase
the speed of innovation. We are reducing the number of physical product mock-ups created for new product
initiatives. Virtual shelving and displays are simplifying the way we test our brands with top customers, and
new product modeling tools are improving our engineering and design productivity.29

Revlon. We strengthened the capabilities of our leadership team in 2011 through key management
appointments, including Xavier Garijo as Chief Supply Chain Officer and Lauren Goldberg as General Counsel.
We are focused on continuously strengthening our capabilities by developing our people and by recruiting
talented and experienced individuals across all functions in the organization.

Acting globally is a principle that guides how we think, plan and act across all of our brands and regions. We
are leveraging brand positioning, portfolio planning and brand communications plans globally, and we are
focused on improving our operating efficiency through many activities, including global supply chain
management.30

The March 2011 disaster in Japan and its aftermath could impact the Companys global supply chain from
Japan, which could adversely affect the Companys business, financial condition and/or results of operations.
The Company is continuing to assess the potential impact of the March 2011 disaster in Japan and its
aftermath on the Companys global supply chain. The Company purchases materials from suppliers in Japan
and from other suppliers who source materials from suppliers in Japan.

28
LOral 2011 Annual Report, June 2011, p. 77, http://www.loreal-finance.com/_docs/us/2011-annual-report/LOREAL_Rapport-Activite-2011.pdf, accessed June 15,
2016.
29
Proctor & Gamble 2011 Annual Report, August 2011, p. 5, http://www.pginvestor.com/interactive/lookandfeel/4004124/PG_2011_AnnualReport.pdf, accessed
June 15, 2015.
30
Revlon 2011 Annual Report, April 2012, p. 4, http://phx.corporate-ir.net/phoenix.zhtml?c=81595&p=irol-reportsannual, accessed June 15, 2016.

Page 39
Any significant interruption in the supply of materials from Japan could adversely affect the Companys global
supply chain and its ability to produce certain products, most of which are sold globally.31

2012
Clorox. One of our biggest challenges in fiscal year 2012 was pressure on our margins from inflation, rising
commodity costs and strategic infrastructure investments, including an upgraded information technology (IT)
system in Latin America and our new Pleasanton, Ca., campus. We are focused on rebuilding our margins and
have plans in place to drive both our top-line and bottom-line growth.32

Church & Dwight. Our annual adjusted free cash flow has increased by $327 million over the past 10 years.
This reflects excellent working capital management by our financial and supply chain teams in managing our
working capital and has enabled us to achieve free cash flow conversion that leads the consumer packaged
goods industry. Over the next 3 years, we anticipate that we will generate over $1.2 billion in free cash flow.
This will enable us to aggressively pursue acquisitions, make capital investments to continue to support the
profitable growth of our existing businesses, and return cash to our shareholders.33

Colgate. Integral to Colgates global strategy is the ability to generate funds to invest in business growth.
Through both established efficiency programs applied to all aspects of our business and ongoing identification
of new ways to find savings, the Company constantly strives to improve its organizational capabilities and
speed, while reducing costs.

Generating Savings By Integrating Manufacturing Acquired in June 2011, the Sanex brand has strengthened
Colgates market share positions in the body cleansing and deodorant categories in several key countries in
Europe and Colgates overall personal care business throughout the region. By integrating production of all
Sanex shower gel and bath foam into the Companys Anzio, Italy manufacturing facility, Colgate is saving
nearly $3 million annually. The facility incorporates the most recent Good Manufacturing Practice guidelines
for improved quality and microbiology effectiveness.34

At Colgate, increasing effectiveness and efficiency is key to driving profitable growth. One excellent example is
a new formula for fabric conditioners, sold globally under the Suavitel and Soupline brand names. The new
formula is stickier on the surface so more of the softening ingredient remains active and the fragrance lasts
longer. This breakthrough formula supports stronger claims, such as deliciously soft, three times longer fresh
and 30 days of freshness, and is generating annual cost savings of $20 million.

31
Revlon 2011 Annual Report, April 2012, p. 30, http://phx.corporate-ir.net/phoenix.zhtml?c=81595&p=irol-reportsannual, accessed June 15, 2016.

32
Clorox 2012 Annual Report, August 2012, p. 3, https://www.thecloroxcompany.com/downloads/annual-reports/ar12_complete.pdf, accessed June 15, 2016.
33
Church & Dwight 2012 Annual Report, December 2012, p. 5, http://investor.churchdwight.com/phoenix.zhtml?c=110737&p=irol-reportsannual, accessed Juen 15,
2016.
34
Colgate 2012 Annual Report, April 2012, p. 10, http://files.shareholder.com/downloads/CL/2155187601x0x648088/60727e50-7f73-4fe1-8919-
b3b2d2bfc4e1/Colgate_2012_AR.pdf, accessed June 15, 2016.

Page 40
Colgate has also increased efficiency in this category by reducing the number of fabric conditioner formulas
and fragrances used globally by half.35

Este Lauder. Enabled in part by SMI, we continue to make strategic enhancements to our global supply
chain with a focus on improved customer service, safety and quality to better support our profitable growth
strategy for the long term. With the removal of structural roadblocks, regional and global centers are becoming
better able to quickly respond to shifting markets and demand, optimizing distribution into one efficient network.
We continue to consolidate our supplier base to focus on relationship building with fewer, more strategic
suppliers, which is resulting in better collaboration and a shared sense of success. We closed seven
distribution centers in fiscal 2012, consolidating certain operations with no business interruption, and we
continue to seek opportunities for making even greater improvements. We also have made significant strides in
building our digital and consumer insights capabilities across the organization. With each passing year, we find
our consumers are increasingly mobile, diverse and accessible. They frequent not only traditional High-Touch
department store counters, but also our growing number of stand-alone retail formats.36

LOral. 2012 was also a year of strong value creation and growth in financial results, with our sales growth
attaining double-digit figures. Operating profit and net profit reached record levels, and there was a spectacular
increase in cash flow. These results illustrate the strength and efficiency of the LOral business model.
Thanks to the solidity and quality of our results and the companys very favorable prospects, the Board of
Directors will propose a further substantial dividend increase of +15% to 2.30 euros at the next Annual General
Meeting.37 Digital also brings more creativity. The video clip Love Your Lips, created for the launch of Rouge in
Love by Lancme exclusively for webcasting, generated an incredible viral effect and was viewed 120 million
times in China!

Furthermore, digital media paves the way for new forms of personalized advice and services that are even
better targeted: for example, the Active Cosmetics Division in China has created an information and advice
service for women with sensitive skin, eskin, which is proving highly successful. LOral Paris, with its website
get the Look, answers the most frequently asked questions on search engines by providing beauty advice in
near real time through articles and videos. Finally, in the United States, the LOral Paris brand is developing
Destination Beauty, the countrys first YouTube channel dedicated to beauty. Another acceleration: e-
commerce. Kiehls and The Body Shop are pointing the way forward here, and have succeeded in perfect
multi-channel integration. Their marketing model, which builds customized relationships, accompanies
customers wherever they may be, online and offline, and even on their mobile phones, providing a better
understanding of their buying impulses.

35
Colgate 2012 Annual Report, April 2012, p. 10, http://files.shareholder.com/downloads/CL/2155187601x0x648088/60727e50-7f73-4fe1-8919-
b3b2d2bfc4e1/Colgate_2012_AR.pdf, accessed June 15, 2016.
36
Este Lauder 2012 Annual Report, June 2012, p. 71, http://investors.elcompanies.com/phoenix.zhtml?c=109458&p=irol-reportsannual, accessed June 15, 2016.
37
LOral 2012 Annual Report, June 2012, p. 7, http://investors.elcompanies.com/phoenix.zhtml?c=109458&p=irol-reportsannual, accessed June 15, 2016.

Page 41
Finally in Japan, the trailblazer for m-commerce (1), all the groups Internet sales sites are mobile-compatible,
with very promising results for the future. LOral Luxe already makes more than 20% of its total sales via e-
commerce.38

P&G. February 2012, the Company announced a $10 billion productivity and cost savings plan to reduce
costs in the areas of supply chain, research and development, marketing and overhead expenses. The plan is
designed to accelerate cost reductions by streamlining management decision making, manufacturing and other
work processes in order to help fund the Company's growth strategy. The Company expects to incur
approximately $3.5 billion in before-tax restructuring costs over a four-year period as part of this plan.39

In February 2012, the Company announced a $10 billion productivity and cost savings plan to reduce costs
and better leverage scale in the areas of supply chain, research and development, marketing and overheads.
The program was designed to accelerate cost reductions by streamlining management decision-making,
manufacturing and other work processes to fund the Company's growth strategy.40

Revlon. Acting globally is a principle that guides how we think, plan and act across all of our brands and
markets. We continue to leverage our portfolio planning process and our brand communication plans to meet
the needs of our consumers, globally. Additionally, we continue to take specific actions to support our strong
operational results and operating efficiencies, including the optimization of our global supply chain and
manufacturing footprint.41

The 0.2 percentage point increase in gross profit as a percentage of net sales for 2012, compared 2011, was
primarily due to: lower manufacturing costs, including materials and freight costs, as a result of supply chain
cost reduction initiatives, which increased gross profit as a percentage of net sales by 0.6 percentage points;
and lower sales returns and allowances which increased gross profit as a percentage of net sales by 0.4
percentage points; with the foregoing partially offset by:the impact of product mix, which reduced gross profit
as a percentage of net sales by 0.5 percentage points; higher costs related to inventory obsolescence, which
reduced gross profit as a percentage of net sales by 0.3 percentage points; and restructuring related charges
recognized in connection with the September 2012 Program, which reduced gross profit as a percentage of net
sales by 0.1 percentage points.42

38
LOral 2012 Annual Report, June 2012, p. 24, http://investors.elcompanies.com/phoenix.zhtml?c=109458&p=irol-reportsannual, accessed June 15, 2016.
39
Proctor & Gamble 2012 Annual Report, August 2012, p. 30, http://annualreport.pg.com/annualreport2012/files/PG_2012_AnnualReport.pdf, accessed June 15,
2016.
40
Proctor & Gamble 2012 Annual Report, August 2012, p. 38, http://annualreport.pg.com/annualreport2012/files/PG_2012_AnnualReport.pdf, accessed June 15,
2016.
41
Revlon 2012 Annual Report, April 2013, p. 5, http://phx.corporate-ir.net/phoenix.zhtml?c=81595&p=irol-reportsannual, accessed June 15, 2016.

42
Revlon 2012 Annual Report, April 2013, p. 48, http://phx.corporate-ir.net/phoenix.zhtml?c=81595&p=irol-reportsannual, accessed June 15, 2016.

Page 42
2013
Clorox. This years report has been developed according to the Global Reporting Initiative (GRI) G3.1
guidelines, which provide a recommended framework and key performance indicators for sustainability
reporting. More information on the G3.1 guidelines is available at globalreporting.org.43

We plan to evolve our 3D demand-creation model of desire, decide and delight to engage with consumers in a
more meaningful way and ensure were addressing their product needs. This evolution will include seeking
more granular insights about when and where consumers are open to communications, and expanding our
digital capabilities to better target and personalize consumer messages and address the growing role of e-
commerce. Well look to enhance our supply chain to be more flexible and better anticipate the needs of
consumers and customers. Well also continue to focus on the value proposition of our brands, emphasizing
product superiority and meaningful innovation.

As we continue our transformation into an even more agile enterprise, were placing the consumer at the
center of everything we do. When it comes to our day-to-day tasks and operational processes, well focus on
work that drives the highest value to our consumers and ultimately leads to profitable growth. This means
eliminating waste, or ineffective work, across the enterprise. Delivering strong cost savings, reducing selling
and administrative expenses to 14 percent or less of sales over time and driving our sustainability initiatives
are priorities that will help reduce waste and fund growth. When I think about our Centennial Strategy
performance and our vision for 2020, the term constancy of purpose comes to mind. Weve set clear goals
and aspirations for our next set of milestones. Were leveraging the power of our brands, building on proven
results and focused on a purposeful strategy, while remaining grounded in strong principles of corporate
responsibility and always remembering our greatest competitive advantage is our people. 44

Church & Dwight. Our annual free cash flow (defined as cash from operating activities less capital
expenditures) has increased by over $269 million over the past 10 years. This reflects excellent working capital
management by our financial and supply chain teams, and has enabled us to lead the consumer packaged
goods industry by consistently converting over 100% of net income into free cash flow (free cash flow
conversion). Over the next 3 years, we anticipate that we will generate over $1.5 billion in free cash flow. This
will enable us to aggressively pursue acquisitions, make capital investments to continue to support the
profitable growth of our existing businesses, and return cash to our shareholders. We have increased our
annual dividend by 11% in 2014 to a current yield of approximately 2%.45

43
Clorox 2013 Annual Report, August 2013, p. 2, https://www.thecloroxcompany.com/downloads/annual-reports/ar13_complete.pdf, accessed June 15, 2016.
44
Clorox 2013 Annual Report, August 2013, p. 4, https://www.thecloroxcompany.com/downloads/annual-reports/ar13_complete.pdf, accessed June 15, 2016.

45
Church & Dwight 2013 Annual Report, December 2013, p. 4, http://investor.churchdwight.com/phoenix.zhtml?c=110737&p=irol-reportsannual, accessed June 15,
2016.

Page 43
Colgate. Beyond new products, innovation is embedded into the Companys culture to encourage new ideas
and improved processes throughout every aspect of the organization from the supply chain to marketing to
finance and all support services.46

LOral. Another key development is the strengthening of our presence in Africa, with the opening of the plant
at Cairo, Egypt, running since May 2013. Furthermore, with the acquisition of Interbeauty, whose factory is in
Nairobi, LOral now has three industrial entities to serve consumers in the Africa, Middle EastZone. In
Colombia, the factory acquired with the Vogue brand is currently being expanded to meet strong local demand.

In Asia-Pacific, the Yichang plant in China has had its production capacity increased, and is now the largest
make-up production facility in Asia.47

P&G. We are significantly strengthening productivity and cost savings efforts. Innovation and productivity are
the two biggest drivers of value creation. Innovation remains our primary driver of growth, and we have a
strong innovation pipeline, but we need to increase our focus on productivity. Productivity provides financial
resources to invest in growth, and productivity frees P&G people to fully utilize their capabilities and make
bigger contributions to the business.48

Unilever. To meet our growth targets we have invested in additional manufacturing capacity. In 2013, we
invested 1.6 billion, including in six new factories, with five additional factories planned in 2014. These
factories include eco-efficiency technologies such as building orientation and design to minimize energy use,
heat recovery, low-energy lighting, energy-efficient motors and rainwater harvesting and re-use for factories in
water-stressed locations. By the end of 2013, three quarters of our factory network had achieved zero non-
hazardous waste disposal to landfill.

We are also extending our World Class Manufacturing (WCM) program, which sets a global benchmark for
the reduction of waste and cost. By 2014, almost half our total production costs will be from sites in the WCM
program.

However, we recognize that we need still more speed in our processes, decision-making, and execution. We
have therefore begun Project Half for growth, designed to simplify our processes, increase our agility, and
create savings half the time, half the spend, half the hassle. One of the ten key areas we will simplify is our
number of stock-keeping units (SKUs). We have started a program selectively to remove SKUs with low
turnover. We believe that this simplification will significantly reduce the number of formulations, materials and
non-strategic suppliers that we use, driving costs down. We intend to create space to deliver growth from
innovation and enhance our ability to act quickly. We will also use the efficiency savings to invest in our
brands.

46
Colgate 2013 Annual Report, April 2013, p. 8, http://files.shareholder.com/downloads/CL/2155187601x0x736806/a0097ba1-4103-494c-9106-
ab5d4db12c7a/2013_Colgate_Annual_Report.pdf, accessed June 15, 2016.
47
LOral 2013 Annual Report, June 2013, p. 30, http://www.loreal-finance.com/_docs/0000000006/LOREAL_Rapport-Activite-2013_GB.pdf, accessed June 15, 2016.
48
Proctor & Gamble 2013 Annual Report, August 2013, p.2,
http://www.pginvestor.com/Cache/1001180053.PDF?O=PDF&T=&Y=&D=&FID=1001180053&iid=4004124, accessed June 15, 2016.

Page 44
We have more than 100,000 suppliers and we deliver to more than 8 million stores. By working with these and
other partners we can reach more consumers, develop new products, build new capacity, increase margins,
and nurture sustainability. Were also continuously improving our own operations to get the benefits of our
unique scale and reach.49

Revlon. The Companys vision is to establish Revlon as the quintessential and most innovative beauty
company in the world by offering products that make consumers feel attractive and beautiful. We want to
inspire our consumers to express themselves boldly and confidently. The Companys strategic goal is to
optimize the market and financial performance of its portfolio of brands and assets. we are focused on
eliminating non-value added general and administrative costs in order to fund reinvestment to facilitate
growth.50

2104
Clorox. Fund growth by reducing waste in our work, products and supply chain. As we continue our agile
enterprise transformation, serving our consumers is job one. Were focused on work that drives the highest
value for our consumers and ultimately drives more profitable growth. In fiscal year 2015, delivering strong cost
savings, reducing selling and administrative expenses and driving our sustainability initiatives will continue to
be priorities to drive productivity gains and fund growth.51

Colgate. Our approach to innovation closely aligns consumer insights with the product development process,
underpinned by science. At our nine consumer innovation centers, strategically located to stay close to the
consumer in different parts of the world, marketing and consumer insight professionals test and observe
consumer behavior to learn how consumers live and what they want. Colgate scientists at our global and
regional technology centers then combine this information with scientific innovation to bring new products to
life. Our innovation strategy casts a wide net, ensuring that we source innovative solutions and opportunities
from a variety of external partnerships, which augment our strong internal capability.52

Generating savings to invest in growth is critical to Colgates business success. Savings are realized through
ongoing efficiency programs and through the 2012 Restructuring Program, a four-year Global Growth and
Efficiency

Program designed to improve the Companys organizational capabilities and streamline our cost structure. The
2012 Restructuring Program is proceeding smoothly and, in fact, in 2014, was expanded to take advantage of
additional savings opportunities. As a result of the expansion, we anticipate additional savings of $65 million,
for a total of $340-$390 million after tax annually by the end of 2016, the fourth year of the program.

49
Unilever 2013 Annual Report, December 2013, p. 20, https://www.unilever.com/Images/unilever-ar13_tcm244-421851_en.pdf, accessed June 15, 2016.
50
Revlon 2013 Annual Report, April 2014, p. 3, http://phx.corporate-ir.net/phoenix.zhtml?c=81595&p=irol-reportsannual, accessed June 15, 2016.
51
Clorox 2014 Annual Report, August 2015, p. 2, https://annualreport.thecloroxcompany.com/_pdf/Clorox_2014_Annual_Report.pdf, accessed June 15, 2016.
52
Colgate 2014 Annual Report, April 2015, p. 17, http://files.shareholder.com/downloads/CL/2155187601x0x817641/61f4c0b0-ebf3-4e17-83de-
50a14465c984/Colgate_2014_AR_Web_Ready.pdf.pdf, accessed June 15, 2016.

Page 45
Reinvestment is focused on innovation and brand building, enabling technology and analytics, digital
engagement and driving growth in emerging markets.

Two significant initiatives in the program are expanding our use of commercial hubs, which cluster single-
country subsidiaries into more efficient regional hubs, and expanding our Colgate business service centers to
streamline our cost structure. During 2014, we made great progress with these efforts. We established six
hubs across Europe, and they are already driving greater efficiency throughout the region. For example, prior
to the formation of our Central Europe West hub, Austria, Germany and Switzerland, were using four different
commercial-planning processes. Operating as a hub, the region is now aligned behind one improved planning
process to develop more accurate production forecasts and greater operational efficiency. These activities are
leading to smarter and faster decision making on the ground and, in 2014, helped to increase operating profit
margin for the Europe/South Pacific division by 200 basis points versus the prior year. Other hubs established
in 2014 include the North Africa Middle East hub and the Greater Indo-China hub. Similarly, Colgates regional
business service centers are driving efficiency by standardizing and simplifying tasks on behalf of subsidiaries
in an expanded range of functions including finance, customer service and logistics, master data management
and analytics. All three centers, located in Warsaw, Poland, Mumbai, India, and Mexico City, Mexico, are now
fully operational. Importantly, these centers are all co-located with other Colgate businesses and are staffed
with Colgate employees.53

Este Lauder. We believe e-commerce and m-commerce will continue to be the fastest-growing prestige
beauty distribution channels worldwide for years to come. This past fiscal year, we made great strides in
reaching consumers online, on their phones and through social media platforms. We are generating impressive
sales through our many e-commerce channels, such as those in the United States and the United Kingdom,
and are the number one prestige beauty company on several major retailer websites: Este Lauder is the best-
selling prestige beauty brand on four-out of-six major retailers e-commerce sites in the United States, and
MAC holds leadership positions on several United Kingdom e-commerce sites. We are applying what we
have learned from our digital success in the United States to other markets around the globe. In China, digital
sales are reshaping the retail landscape, with our online beauty sales doubling this year. Clinique launched a
flagship brand store on Tmall in China, a Chinese-language shopping platform, and attracted more than
100,000 new consumers to the brand in the first year. Many of those consumers live in smaller Chinese cities
where we have little or no distribution, and they were introduced to the brand on this platform. Building on that
success, Este Lauder has launched its own store on Tmall in China, and Origins will follow later this year.54

53
Colgate 2014 Annual Report, April 2015, p. 19, http://files.shareholder.com/downloads/CL/2155187601x0x817641/61f4c0b0-ebf3-4e17-83de-
50a14465c984/Colgate_2014_AR_Web_Ready.pdf.pdf, accessed June 15, 2016.
54
Este Lauder 2014 Annual Report, September 2014, p.27, http://investors.elcompanies.com/phoenix.zhtml?c=109458&p=irol-reportsannual, accessed June 15,
2016.

Page 46
P&G. As a result of the Companys strategic focus on leading brands, we will accelerate and over-deliver the
original $10billion productivity plan we announced in 2012. We see significant savings potential ahead across
all spending elements cost of goods sold, marketing spending, and overhead for the next several years. In cost
of goods sold, we are already achieving productivity improvements beyond our original savings objectives.
Better manufacturing reliability and adherence to quality standards are resulting in less raw material usage and
reduced finished product scrapping. Increasing localization of the supply chain is driving savings in
transportation and warehousing costs. Earlier this year, we initiated what is probably the biggest supply chain
redesign in the Companys history, starting in North America. Were moving from primarily single-category
production sites to fewer multi-category production plants. Were simplifying, standardizing and upgrading
manufacturing platforms for faster innovation, qualification and expansion, and improved product quality.
Weve reduced roles by 16% more than 50-% above the original objective, and two years sooner than
planned. This is strong progress, and we see more opportunity ahead.55

Revlon. The Companys integration initiatives in connection with the Colomer Acquisition have included
actions to integrate Colomers operations into the Companys business, as well as additional restructuring
actions to reduce costs across the Companys businesses (all such actions, together the Integration
Program). The Integration Program is designed to deliver cost reductions throughout the combined
organization by generating synergies and operating efficiencies within the Companys global supply chain,
consolidating offices and back office support, as well as actions designed to reduce selling, general and
administrative expenses. Certain actions that are part of the Integration Program are subject to consultations
with employees, works councils or unions and governmental authorities. The Company plans to substantially
complete the Integration Program by the end of 2015.56

2015
Clorox. We want to drive an agile enterprise, eliminating low-value activity and simplifying our work. Reduce
costs through product cost innovation, supply chain network strategies and enterprise optimization program

Were focused on identifying ways to reduce waste in every aspect of our business so that savings we
generate can be reinvested to drive growth. A major emphasis within this strategy is to build an even stronger
agile enterprise that streamlines our work to focus on those activities consumers are willing to pay for. In fiscal
year 2015, we drove significant productivity gains across a number of functions, including $116 million in cost
savings.

Another priority has been reducing our overall environmental footprint. We continued to make sustainability
improvements in our operations and remain confident of reaching all our 2020 goals.

55
Proctor & Gamble 2014 Annual Report, August 2014, p. 2-3,
http://www.pginvestor.com/interactive/lookandfeel/4004124/PG_Annual_Report_2014.pdfhttp://www.pginvestor.com/interactive/lookandfeel/4004124/PG_Annu
al_Report_2014.pdf, accessed June 15, 2016.
56
Revlon 2014 Annual Report, April 2015, p. 48, http://phx.corporate-ir.net/phoenix.zhtml?c=81595&p=irol-reportsannual, accessed June 15, 2016.

Page 47
The companys Fairfield, California, plant achieved zero waste-to-landfill status, a designation indicating the
facility recycles or repurposes at least 90 percent of its waste; sends the remaining 10 percent or less to a
waste-to-energy facility; has virtually no recyclables in any landfill waste container; and has passed an audit by
the environment and sustainability team.

Changes to both the formula and manufacturing process for Kingsford charcoal generated significant annual
cost savings that were reinvested in demand-creation programs to drive a record year for the business in both
top- and bottom-line performance. An innovative design that added small air pockets helped improve the
consumer experience by enabling the briquets to get hotter faster while also improving the sustainability profile
by using less raw material and creating a smaller transportation footprint.

A cross-functional team contributed to volume growth through better management of our logistics network,
ultimately lowering costs and improving service levels.57

Church & Dwight. In 2015, our annual free cash flow was $544 million with an adjusted free cash flow
conversion rate of 125%. This reflects excellent working capital management by our financial and supply chain
teams in managing our working capital and has enabled us to lead the CPG industry by consistently converting
over 100% of net income into free cash flow (free cash flow conversion).

Over the next 3 years, we anticipate that we will generate over $1.7 billion in free cash flow. This will enable us
to aggressively pursue acquisitions, make capital investments to continue to support the profitable growth of
our existing businesses, and return cash to our stockholders.58

Colgate. Making sure our products are broadly available, even in the tiniest, most remote rural areas, is
fundamental to our success in these regions. In India, we are using the power of digital technology to discover
gaps in distribution by mapping villages and identifying those that do not have Colgate products. By adding
distributors and tripling the number of vans and sales representatives to reach these remote areas, we now
cover almost 60,000 villages directly, more than double the number in 2012. As a result, our rural market share
for Colgate toothpaste in India increased to 60% in 2015, with our national share at 55%. Importantly, those
numbers reflect a pattern of people migrating, over time, from rural villages to larger towns and continuing to
use Colgate toothpaste.59

57
Clorox 2015 Annual Report, https://annualreport.thecloroxcompany.com/strategy-growth.php, accessed June 15, 2016.
58
Church & Dwight 2015 Annual Report, http://investor.churchdwight.com/phoenix.zhtml?c=110737&p=irol-reportsannual, accessed June 15, 2016.
59
Colgate 2015 Annual Report, p.4, http://files.shareholder.com/downloads/CL/2155187601x0x882566/C197DA96-7ECE-425D-8969-6E5465F055A5/Colgate-
Palmolive_2015-Annual-Report.pdf, accessed June 15, 2016.

Page 48
Este Lauder. Fiscal 2015 was also an exciting time for the convergence of new communication channels,
digital commerce and service. These platforms are fully interconnected and increasingly influencing
consumers buying behaviors. We believe we are well positioned to take advantage of the opportunities
afforded to us by the rapid pace of global digital techniques that are revolutionizing how more and more
consumers experience and interact with brands.60

The fiscal 2015 increase in cash flows provided by operating activities as compared with fiscal 2014 primarily
reflected a favorable change in accounts receivable, reflecting the timing of shipments and improved
collections, a favorable change in inventory, reflecting our initiative to better align supply levels with forecasted
demand and other supply chain improvements, and a favorable change in accounts payable, primarily due to
the timing of payments. The accelerated orders in connection with our July 2014 SMI implementation also
contributed to the favorable changes in these working capital components and the decrease in net earnings as
compared to fiscal 2014.61

P&G. The foundational building block of Operating TSR is operating cash flow, and our strong cash flow
performance for many years has enabled reinvestment in the business and steady returns to shareowners.
The second building block is operating margins, which we have started to improve and will continue to improve
as we move into the core business portfolio and continue to execute our innovation and productivity programs
with excellence. The third building block is organic sales growth, which has been modest, but will improve as
we build household penetration on more of our brands and introduce an even stronger lineup of new and
improved products that are coming to market over the next one, two and three years. Operating TSR is a
balanced measure of performance, and everyone in the Companythe technician on the manufacturing floor,
the sales person in the retail store, the scientist in the innovation labis focused on their contribution to deliver
consistent and reliable growth and value creation.62

We are rededicating ourselves to the power of execution. We are raising our standards to be the best at
execution. We are renewing focus on gaining trial among consumers at the point of market entry. We are
recommitting to superior advertising to create awareness and sampling clearly superior-performing products to
attract consumers to our brands. We are investing in our sales force to build profitable distribution and shelf
assortment. We are investing in a more agile, flexible and faster distribution network to reduce out-of-stocks
and optimize inventory. And we are renewing our manufacturing operations to improve quality and to
accelerate innovation at lower cash, capital and operating costs. Execution is the only strategy a consumer
sees, and we intend to be the best.63

60
Este Lauder 2015 Annual Report, September 2015, p. 6, http://investors.elcompanies.com/phoenix.zhtml?c=109458&p=irol-reportsannual, accessed June 15,
2016.
61
Este Lauder 2015 Annual Report, September 2015, p. 76, http://investors.elcompanies.com/phoenix.zhtml?c=109458&p=irol-reportsannual, accessed June 15,
2016.
62
Proctor & Gamble 2015 Annual Report, August 2015, p. 3,
http://www.pginvestor.com/Cache/1001201800.PDF?O=PDF&T=&Y=&D=&FID=1001201800&iid=4004124, accessed Juen 15, 2016.
63
Proctor & Gamble 2015 Annual Report, August 2015, p. 4,
http://www.pginvestor.com/Cache/1001201800.PDF?O=PDF&T=&Y=&D=&FID=1001201800&iid=4004124, accessed Juen 15, 2016.

Page 49
Recommendations
In supply chain benchmarking it is important to look at performance and improvement of peer
companies over time. Here we look critically at two segments of the Consumer Packaged Goods
industry. In these industry segments, a focus on historic continuous improvement and best practices
made them slow to shift to market dynamics. As a result they are stuck and going backwards. Each
industry analysis tells a different story.

As companies study supply chain excellence and corporate performance, we recommend that they:

1) Build a Guiding Coalition to Drive Improvement Based on Industry-Specific Data.


Organizations should benchmark companies within an industry. Each industry has unique rhythms
and cycles. As a result, supply chain excellence analysis needs to be within an industry. No
company within the Household Products, and Beauty supply chains has exercised power to
improve the value chain. The Household Products, and Beauty industries honed supply chain
processes in the last decade and continued to refine these, despite shifts in the market, through
continuous improvement processes. Because the shifts were subtle, the industry did not adapt.
This is in sharp contrast to the consumer electronics industry where the shifts were swift and
threatened profitability. In these cases, the industry was forced to adapt quickly. Companies that did
not adapt went out of business. In the case of the Household Products, and Beauty industries, now
is the time to build a guiding coalition to drive change.
2) Understand Supply Chain Potential and Orchestrate Trade-offs on the Effective Frontier.
Supply chain leadership teams should analyze the total portfolio of metrics and study progress at
the intersections of the Effective Frontier. Companies with higher performance are using more
advanced analytics to plan outcomes and design the supply chain
3) Apply Systems Theory. Teams should evaluate performance over time to understand
improvement while realizing they are managing a complex system. The functions should be aligned
to a balanced portfolio of metrics representing the Effective Frontier, while functional metrics should
be focused on improving reliability (e.g., first-pass yield, hands-free orders, and supplier quality,
etc.).
4) Focus on Building Value Networks. Few Household Products or Beauty companies are leaders
in driving improvements in value chain effectiveness. While many of these companies could be a
powerbroker in the industry to redefine outside-in processes, all companies are accepting the
limitations of the inside-out supply chain. To drive the necessary change, the Household Products,
and Beauty companies need to take charge of the supply chain in the channel and translate and

Page 50
orchestrate demand. This orchestration needs to move from the customers customer to the
suppliers supplier while orchestrating price, margin and complexity to better serve markets.
5) Learn from Other Industries. Use a Steady Hand/Focused Leadership to Drive Improvement.
Companies within the Household Products, and Beauty industries were early adopters of supply
chain analytics and Supply Chain Operating Network technologies twenty years ago. In the last
decade, with a focus on cost mitigation and M&A, the companys focus on efficiency and
continuous improvement were not adequate. There was a need to drive a redesign. To make the
necessary improvements, companies today, must move past an ERP-centric view and build
outside-in processes with a focus on value-based outcomes. They can learn how to power these
outside-in processes from the high-tech industry.

Conclusion
The shifts in the consumer value chain ups the ante for the supply chain team. Overall performance
on the Supply Chain Metrics That Matter is stalled. It is time to cast off traditional practices and
redesign the supply chain, from the outside-in, to better serve the shopper. To understand who
performed best within the peer group, we systemically analyzed Household Products and Beauty
company performance on the Effective Frontier. Clorox, and LOral are winners of the Supply Chains
to Admire analysis for 2016 with Este Lauder posting results as a strong finalist.

Page 51
Prior Reports in This Series
Over the course of the last four years our methodology has changed and matured. You can track our
progress and find industry-specific information here:

Supply Chain Metrics That Matter: A Focus on Retail


Published by Supply Chain Insights in August 2012.

Supply Chain Metrics That Matter: A Focus on Automotive


Published by Supply Chain Insights in September 2012.

Supply Chain Metrics That Matter: A Focus on Automotive


Published by Supply Chain Insights in August 2015

Supply Chain Metrics That Matter: The Cash-to-Cash Cycle


Published by Supply Chain Insights in November 2012.

Supply Chain Metrics That Matter: A Focus on the Consumer Products Industry
Published by Supply Chain Insights in December 2012.

Supply Chain Metrics That Matter: Driving Reliability in Margins


Published by Supply Chain Insights in January 2013.

Supply Chain Metrics That Matter: A Focus on Hospitals


Published by Supply Chain Insights in January 2013.

Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail
Published by Supply Chain Insights in February 2013.

Supply Chain Metrics That Matter: A Focus on Consumer Products Manufacturers


Published by Supply Chain Insights in February 2013.

Supply Chain Metrics That Matter: A Focus on Consumer Electronics


Published by Supply Chain Insights in April 2013.

Supply Chain Metrics That Matter: A Focus on Apparel


Published by Supply Chain Insights in May 2013

Supply Chain Metrics That Matter: A Focus on Contract Manufacturing


Published by Supply Chain Insights in August 2013

Supply Chain Metrics That Matter: A Focus on the Automotive Industry


Published by Supply Chain Insights in October 2013

Supply Chain Metrics That Matter: A Closer Look at the Cash-To-Cash Cycle (2000-2012)
Published by Supply Chain Insights in November 2013

Page 52
Supply Chain Metrics That Matter: Third Party Logistics Providers
Published by Supply Chain Insights in December 2013

Supply Chain Metrics That Matter: A Critical Look at Operating Margin


Published by Supply Chain Insights in December 2013

Supply Chain Metrics That Matter: A Closer Look at Consumer Products Companies
Published by Supply Chain Insights in April 2014

Supply Chain Metrics That Matter: A Closer Look at Chemical Companies


Published by Supply Chain Insights in May 2014

Supply Chain Metrics That Matter: A Closer Look at Consumer Products Companies
Published by Supply Chain Insights in June 2014

Supply Chain Metrics That Matter A Focus on Consumer Products Companies


Published by Supply Chain Insights in April 2015

Supply Chain Metrics That Matter A Focus on Chemical Companies 2015


Published by Supply Chain Insights in May 2015

Supply Chain Metrics That Matter: A Focus on Consumer Products Companies-2015


Published by Supply Chain Insights in June 2015

Supply Chain Metrics That Matter: A Focus on Consumer Products 2015


Published by Supply Chain Insights in August 2015

Supply Chain Metrics That Matter: A Focus on the High-Tech Industry 2015
Published by Supply Chain Insights in January 2016

Supply Chain Metrics That Matter: A Focus on Pharmaceutical Companies 2016


Published by Supply Chain Insights in May 2016

Supply Chain Metrics That Matter: A Focus on Medical Device Companies 2016
Published by Supply Chain Insights in May 2016

Supply Chain Metrics That Matter: A Focus on Food and Beverage Companies-2016
Published by Supply Chain Insights in June 2016

These reports, and additional information on the Supply Chain Metrics That Matter methodology, are
available at our Supply Chain Insights website and in the Beet Fusion community.

Page 53
Appendix
Here we share more data to help the reader understand the math behind this report.

Methodology: Understanding the Math and Ratios


Throughout this report we reference a number of commonly used financial ratios. Each company has
a unique potential. The potential is based on the size of the company and the drivers within the
industry. As shown in Figure A, each has a major impact on the companys potential on the Effective
Frontier.

Here is a summary of the definitions of the ratios used in this report.

Figure A. Measurement Definitions

Page 54
Supply Chain Index Methodology: Formulas and
Calculations

Supply chain leaders are competitive. Each wants to drive performance improvement faster than the
peer group. To gauge improvement, companies need to compare and benchmark. To make this
easier, we developed the Supply Chain Index. In the building of the Index, we used financial ratios
versus absolute numbers. The use of ratios allowed us to compare companies regardless of size, and
also compare companies across currencies.

The Index has three factors: balance, strength and resiliency. In this report, the three factors were
calculated for the periods of 2006-2009, 2010-2015 and 2006-2015. Our goal was to understand pre-
recession and post-recession trends while also looking at progress over the longer-term view. The
companies within the industry are stack ranked based on performance within each factor and given a
ranking. The rankings are then built into an index based on overall performance of the three factors.

The math behind the Index is defined below. This methodology was built in cooperation with the
Operations Research faculty at Arizona State University (ASU) in the spring of 2014.

Balance
To develop the balance factor used in the Index, we evaluated a scatter plot of revenue growth and
Return on Invested Capital (ROIC) for a specific company. The balance factor (B) is the proportional
difference of points on an orbit chart for the period of 2006-2012 at the intersection of revenue growth
and Return on Invested Capital. To calculate the balance factor, let REVi denote the revenue growth

of the ith time period, ROIC i denote the return on invested capital of the ith time period and n denote

the total number of periods under consideration. Thus the balance factor is defined as:

1 REVn REV1 ROIC n ROIC1


B
n 1 REV1 ROIC1 .

Strength
Strength factor is a similar calculation to balance factor, but with a focus on the intersection of
operating margin and inventory turns. For this analysis, we used a scatter plot of operating margin
and inventory turns on an orbit chart for a specific company. Let OM i denote the operating margin of

Page 55
the ith time period (e.g. ith year), ITi denote the inventory turns of the ith time period and n denote the

total number of periods under consideration. The strength measure (S) is defined as:

1 OM n OM 1 ITn IT1
S
n 1 OM 1 IT1

The denominator reflects that there are n-1 differences between n time periods. Figure B depicts the
intersection of operating margin and inventory turns for an example company. The difference in
operating margin and inventory turns between the first and last time period is shown.

Figure B. Inventory Turns and Operating Margin Intersection for an Example Company

Resiliency
The resiliency factor is a measurement of the tightness of the pattern at the intersection of operating
margin and inventory turns for a given company. For companies that did well, and had a tight pattern,
the value will be lower than companies that lacked reliablity for the period. To develop the value, we
considered a scatter plot of operating margin and inventory turns for a specific company.

Page 56
Let dij denote the Euclidean distance between a pair of points i and j and let m denote the total
number of pairs. The resiliency measure (R) is defined as the mean distance of all possible pairs of
points at the intesection.

That is,

1
R d ij
m i j i

A Closer Look at Inventory Turns: An Important


Measurement
In an ideal world, companies want to turn inventory faster. The faster the turns, the faster the cash
turnover, and the greater contribution to market valuation.

There are two primary measurements for inventory turns. Both are used in the industry. Often they
are used without clarity of the underlying definition. The results are very different.

One is based on inventory turnover as a ratio based on revenue, and the other measures the
inventory turnover ratio based on cost of goods sold. In the period of 2013-2014, at Supply Chain
Insights, when calculating the Supply Chain Index rankings, we used financial information from
YCharts. The methodology used by YCharts is to calculate inventory turns as:

Inventory Turnover = Revenue / Average Inventory

where Average Inventory is equal to the average of the last two reported inventory levels of the
specified frequency. However, in this report, and the subsequent series of industry-specific reports,
we will be using the cost of goods sold formula:

Inventory Turnover = Cost of Goods Sold/Inventory

As can be seen in Tables A and B, the two calculations yield very different results. The larger the
margin in the industry, the greater the difference. With operating margins of 22%, the difference in the
measurement is especially relevant for Consumer Products companies. Consider the differences
between Table A and Table B. When viewed as a ratio based on revenue, the inventory turns value
for the industry for the period of 2006-2015 is 8.44 versus 2.43 for the same period when measured
based on cost of goods sold.

It is for this reason that in the calculation of the Supply Chain Index methodology in this, and

Page 57
subsequent reports in this series, we are using the cost of goods sold method in the calculation of
inventory turns.

Table A. Inventory Turns Analysis for All Industries Using Revenue/Average Inventory

Page 58
Table B. Inventory Turns Analysis for All Industries Using Cost of Goods/Inventory Analysis

In our countdown for the Supply Chain Insights Global Summit, we will be publishing a series of
reports on the Supply Chain Metrics That Matter by industry. In this series we will use the cost of
goods definition for inventory turns.

Page 59
Corporate Overview Data
In looking at the data, it is useful to understand the size and scope of the company. The larger the
company, the more difficult it is to drive year-over-year improvement. As can be seen in the analysis,
it is difficult to gain economies of scale and maintain the competitive position. To help the reader,
here we share some overarching corporate data.

Table C. Household Products Companies Overview

Table D. Beauty Company Overview

Page 60
About Supply Chain Insights LLC
Founded in February, 2012 by Lora Cecere, Supply Chain Insights LLC is beginning its fifth year of
operation. The Companys mission is to deliver independent, actionable, and objective advice for
supply chain leaders. If you need to know which practices and technologies make the biggest
difference to corporate performance, we want you to turn to us. We are a company dedicated to this
research. Our goal is to help leaders understand supply chain trends, evolving technologies and
which metrics matter.

About Lora Cecere


Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and
the author of popular enterprise software blog Supply Chain Shaman currently read
by 5,000 supply chain professionals. She also writes as a Linkedin Influencer and
is a a contributor for Forbes. She has written five books. The first book, Bricks
Matter, (co-authored with Charlie Chase) published in 2012. The second book, The
Shamans Journal 2014, published in September 2014; the third book, Supply
Chain Metrics That Matter, published in December 2014; the fourth book, The
Shamans Journal 2015, published in September 2015 while the fifth book, The Shamans Journal
2016, published in June 2016.

With over 13 years as a research analyst with AMR Research, Altimeter Group, and Gartner Group
and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has worked
with over 600 companies on their supply chain strategy and speaks at over 50 conferences a year on
the evolution of supply chain processes and technologies. Her research is designed for the early
adopter seeking first mover advantage.

Page 61
Endnote
i
How to Find Outliers, July 4, 2016, http://www.varsitytutors.com/ap_statistics-help/how-to-find-outliers

Page 62