Building Resilience: CEOs Need to Be Supply Chain Experts

An analysis of company performance and the career trajectories of S&P 500 CEOs reveals how supply chain management experience can help companies navigate unexpected disruptions.

Authors:

• J. Yo-Jud Cheng
• Dwaipayan Roy

Abstract
In the past, CEO awareness and involvement in supply chain functions were key expectations. But against a backdrop of global events including the COVID-19 pandemic, Russia’s invasion of Ukraine, and disruptions in the Middle East and Panama Canal, is it time for CEOs to become experts in supply chain management? A deep study of S&P 500 CEO career trajectories and analysis of financial performance indicators suggests that CEOs with advanced SCM experience may be key to building more resilient supply chains and dealing with unexpected interruptions.

Many S&P 500 CEOs have risen to the top after holding leadership roles in functions such as finance, strategy, and technology. However, a small but growing number of CEOs have ascended from senior SCM positions over recent years.

In light of discussions about digitization and the obsolescence of supply chain functions, it is not surprising that this experience has become an exception rather than the norm. Yet, recent global events have forced all CEOs to confront supply chain issues directly. The COVID-19 pandemic, Russia’s invasion of Ukraine, and disruptions in the Middle East and Panama Canal underscored the value of a CEO with supply chain expertise who can proactively handle low-probability, high-impact “black swan” events.

The negative impacts of these global events have prompted some CEOs to adopt more direct approaches to protect and restructure their company’s supply chains. Discussions about procurement, production, and logistics that were once solely within the domain of supply chain functions are now taking place in CEO offices. As supply chains become increasingly complex and globalized, CEOs view supply chain resilience as a key determinant of corporate growth over the next three years.

From Supply Chain Management to Corporate Pinnacle

In the past, awareness and involvement in supply chain functions were critical expectations for CEOs. But is it time for CEOs themselves to become experts in supply chain management? A deep study of S&P 500 CEO career trajectories suggests that CEOs with advanced SCM experience may be key to building more resilient supply chains and dealing with unexpected interruptions.

We analyzed the work experiences of S&P 500 CEOs from 2000 to 2021, finding a steady increase in the number of CEOs with senior SCM experience since 2010 despite their relatively small numbers. Seventeen current and former S&P 500 CEOs have held senior SCM positions, including Darren Woods at ExxonMobil, who served as Vice President for Supply and Transportation; Mary Barra at General Motors, who was Executive Vice President of Global Product Development Procurement and Supply Chain; and Tolga Oal at Howmet Aerospace, who was Senior Vice President of Global Purchasing and Supplier Quality Engineering at American Axle & Manufacturing.

We also wanted to understand if there were differences in priorities between CEOs with senior SCM experience and those without. Annual reports provide a window into what company leaders consider important and relevant issues, so we collected these from the 17 companies and analyzed the frequency of terms related to supply chain (such as “inventory,” “supply chain,” “logistics,” and “procurement”). We then compared these reports with those of similar companies in the same industry and year led by CEOs without SCM experience. This process allowed us to conduct precise comparisons, understanding how often both groups mentioned various supply chain-related keywords.

We found that companies led by CEOs with SCM experience more frequently mentioned terms related to supply chains in their annual reports. We also observed these leaders taking proactive measures against potential supply chain challenges and leveraging supply chain functions to create new business opportunities.

Take industrial supplier WW Grainger, for example, whose annual report discusses how the company reduces the risk of supplier concentration by maintaining a diversified vendor base and alternative sourcing plans. Gap Inc.’s end-to-end supply chain transformation has enabled it to “simultaneously improve product quality and speed time to market while reducing costs and eliminating waste.” O’Reilly Auto Parts designed its supply chain to allow multiple weekly inventory replenishments from distribution centers, providing hard-to-find parts.

These three companies are led by CEOs with senior SCM experience who have taken strategic measures to manage their supply chains for various benefits, including enhancing supplier base resilience, reducing waste, and improving customer service.

The Impact on the Bottom Line

Bob Biesterfeld, CEO and supply chain expert at CH Robinson, noted that COVID-19 made supply chain resilience a top priority for all businesses: “Global supply chains and their workforce are critical to the world economy.”

We were curious about whether companies like CH Robinson, led by individuals with SCM experience, had an advantage in dealing with the pandemic. Did they perform better economically during the COVID-19-induced supply chain disruptions?

To analyze financial performance at the onset of the pandemic, we collected data on three metrics—return on assets, asset turnover, and cost of sales ratio—from all S&P 500 companies in 2019 and 2021. We again used a matching process to create two groups of similar companies within the same industry—one led by CEOs with SCM experience and another by those without. We then calculated the average financial performance difference between these groups over the two-year period from 2019 to 2021.

We found that companies led by CEOs with SCM experience were more effective in maintaining profitability, increasing sales, and reducing costs. In contrast, their counterparts (led by CEOs without SCM experience) could maintain profitability but often at a higher cost (such as increased product inventory) or through decreased sales.

We believe the following reasons explain why companies led by CEOs with senior SCM role experience performed stronger:

1. Early Detection and Rapid Response to Supply Chain Disruptions

CEOs with supply chain management backgrounds can identify emerging issues in global supply chains and take early action to avoid major disruptions. For example, under the leadership of CEO Gerald Evans Jr., who previously served as President of Global Supply Chain at Hanes Brands, the company quickly adjusted operations to “swiftly pivot to mass-producing personal protective equipment (PPE) for government agencies, organizations, and consumers.”

2. Heightened Focus on Supply Chain Issues

A multitude of tasks compete for a CEO’s attention daily. CEOs with SCM experience are more likely to have an inherent understanding of the business importance of supply chain functions and prioritize them accordingly. During the pandemic, these CEOs were more likely to allocate time to address supply chain issues and make timely decisions.

3. Comprehensive Understanding of Core Business Operations

As Sascha Menges, CEO of German industrial tool and hardware manufacturer Festool/TTS Tooltechnic, noted, a supply chain role allows individuals to witness “continuous changes in daily operations” and develop an intuitive understanding of business operations. These attributes become crucial as CEOs seek to develop new methods for addressing pandemic-related supply chain disruptions.

How to Cultivate Future CEOs with Supply Chain Management Expertise

Given the many benefits that SCM experience brings to CEOs, we propose three recommendations to help organizations cultivate this expertise among potential CEO and executive candidates:

1. Promote Leadership Programs Covering Supply Chain Functions

Organizations should create leadership programs and development activities to foster supply chain management expertise in promising senior managers and junior executives. By providing learning opportunities for employees at different levels across various SCM functions (such as procurement or logistics), companies can cultivate leaders who possess the necessary knowledge and recognize the critical importance of supply chains within their businesses.

For instance, Honeywell’s Future Supply Chain Leaders program allows high-potential employees to rotate through the organization to gain a deep understanding of its procurement, operations, and transportation functions. Although opportunities for senior executives require customization, systematically providing extended tasks involving SCM functions can achieve similar goals.

2. Elevate the Importance of Supply Chain Management Experience in Succession Planning

In CEO succession planning, boards should be mindful not to overlook leaders who have successfully handled supply chain challenges. During candidate screening, boards should actively seek individuals with SCM experience.

When Office Depot hired Gerry Smith from Lenovo as its CEO, the board specifically highlighted his experience in leading an “industry-recognized supply chain organization” and his long-standing relationships with some of Office Depot’s largest suppliers.

3. Tap into Senior Supply Chain Management Talent

Company leaders and board members can leverage their professional networks to identify external talent with SCM experience for board positions and internal management roles. Board members with senior SCM experience can serve as advisors and mentors to the management team, sometimes even becoming potential CEO candidates.

Before becoming Apple’s CEO, Tim Cook held supply chain management positions at Apple. When it came time to transition leadership, Steve Jobs and Apple’s board recognized the skills Cook had acquired in his background in supply chain management, which equipped him with the capability to lead the company through significant growth.

Recent events indicate that major supply chain disruptions are becoming a persistent issue. As businesses strive to relocate their supply chains closer to home, CEOs with SCM experience may be key to success. Boards must now more than ever recognize the value of CEOs with SCM expertise.

Source: Harvard Business Review