Supply Chain Management: From Vision to Implementation

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Supply Chain Management From Vision to
Implementation

• Chapter 13 Performance Measurement

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Chapter 13 Learning Objectives

1. Describe the role of measurement in shaping a
   companys culture and achieving results.
2. Discuss the strengths and weaknesses of
   traditional measurement practices.
3. Explain how world-class SC measurement improves
   alignment, emphasizes customer orientation,
   promotes process integration, and facilitates
   collaboration.

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Chapter 13 Learning Objectives

1. Identify and implement appropriate measures to
   manage and monitor important processes and
   relationships. Create unique, tailored measures.
   
2. Benchmark performance measures and leading-edge
   SC practices.

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Role of Performance Measurement

• When performance is measured, performance
  improves. When performance is measured and
  reported, the rate of improvement accelerates.
• - Thomas Monson

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Measurement Creates Understanding

• Performance measurement systems provide insight
  into the nature and workings of value-added
  processes.
• A well defined performance measurement system
  provides feedback regarding
• Customer requirements
• Company and supplier capabilities
• Probable success of collaborative initiatives

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Measurement Drives Behavior

• Measurement is more critical than communication,
  training, or perhaps anything else when it comes
  to managing human behavior.
• Measurements influence on behavior is pervasive
  because people pay attention to how they are
  measured.
• Managers must adopt measures that truly promote
  collaborative behavior.

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Measurement Leads to Results

• Measurement is a prerequisite for high level
  execution and attainment of world-class results.
• Well-designed measurement systems must provide
  accurate and relevant information in a timely
  manner.
• Incorrect measurement systems lead to non-aligned
  strategies, poor understanding, and inconsistent
  if not counterproductive behavior.

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Traditional Measurement

• Areas that are essential to measure to accomplish
  customer service and profitability goals
• Asset Management
• Cost
• Customer Service
• Productivity
• Quality

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Measures of Asset Management

• Capital investments are made in facilities,
  equipment, technology, and inventory.
• Asset management measures give managers means to
  judge the efficient and effective use of capital.
• Recent advances have changed conventional wisdom
  with regard to asset management.
• JIT/Lean
• Theory of Constraints

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Measures of Asset Management
Sourcing Operations Logistics
Raw material inventory levels Raw material inventory turns Inventory obsolescence Return on Assets Economic value added Work in process inventory Inventory obsolescence Return on Assets Return of Investment Economic value added Inventory turns Inventory obsolescence Return on Assets Inventory days supply Economic value added
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Measures of Cost

• Cost performance is critical and tracked more
  carefully and comprehensively than any other
  aspect of competitive performance.
• Cost-cutting cannot be done at the expense of
  core capabilities.
• Best practice requires companies to identify
  activities that most impact total cost, adopt
  appropriate metrics, and manage to those metrics.

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Measures of Cost
Sourcing Operations Logistics
Unit price Acquisition cost Total cost of ownership Cost as a percent of sales Administrative Direct labor costs Manufacturing overhead Costs per unit Inventory carrying cost Warranty costs Inventory carrying cost Total landed cost Outbound freight Warehousing labor costs Administrative
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Measures of Customer Service

• Customer service metrics measure the ability of
  the firm to produce the right quantity of product
  and deliver when and where it is needed.
• Time metrics are used as benchmarks for
  flexibility and responsiveness.
• Customer complaints are also tracked.

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Measures of Customer Service
Sourcing Operations Logistics
On-time delivery Order to delivery cycle Percent shipments expedited Response time to inquiry Production to due date Manufacturing cycle time Backorders New product lead time Customer complaints Fill Rate On-time delivery Order cycle time Complete orders Customer complaints
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Measures of Productivity

• Productivity is the ratio of total output to
  total input.
• Productivity growth must not come at the expense
  of quality or customer satisfaction.

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Measures of Productivity
Sourcing Operations Logistics
Purchase orders per employee Dollar spend per employee Commodity teams per employee Percent transactions automated Labor productivity Equipment downtime Changeover time Engineering change orders Total factor Productivity Units shipped per employee Equipment downtime Order productivity Warehouse labor productivity Transportation labor productivity
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Measures of Quality

• Measures of quality track the functionality or
  reliability of a product or service.
• Six Sigma targets a quality level which achieves
  defect rates of less than 3.4 ppm

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Measures of Quality
Sourcing Operations Logistics
Shipments rejected Defect rateparts per million Percent suppliers certified Percent orders from certified suppliers Response to inquiry Defect rateparts per million Percent rework or scrap Statistical process control Total hours quality training per year Percent employees six sigma trained Damage frequency Order entry accuracy Picking/shipping accuracy Document/invoicing accuracy Number of customer returns
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Traditional Measurement - Caveats

• Traditional measurement systems are not holistic,
  they are designed to capture and communicate
  primarily functional information.
• Traditional measures are primarily oriented to
  short-term financial results and cost-cutting.

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Contemporary Supply Chain Measures

• Measurements consistent with supply chain
  management core principles emphasize
• Goal alignment
• Customer satisfaction
• Process integration
• Total costs
• Inter-organizational collaboration

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SC Measures - Alignment

• What gets measured, gets done!
• - Tom Peters
• Often there is little relationship between
  strategic intent and measurement.
• Leads to dysfunctional behavior
• Supply chain managers must align key measures
  within their own organization as well as within
  the supply chain.

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SC Measure Alignment - Traditional
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SC Measures Customer Satisfaction

• Traditional customer service measurements often
  do not provide a clear understanding of customer
  expectation or satisfaction levels.
• Internal service measures do not identify what
  the customer values or their perception of the
  value they receive.

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Customer Satisfaction Metrics

• Traditional Practice
• Internal service measures over satisfaction
  measures
• Measures that are expressed as averages
• Measures that treat all customers the same

• Best-In Class Practice
• External assessment that reveals what customers
  really think is important
• Absolute measure expressed in customer centric
  terms
• Measures that recognize unique needs of
  individual customers

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SC Measures Total Cost

• Total costing is a prerequisite to good process
  design and management
• Total cost is the sum of all the costs incurred
  in planning, designing, sourcing, making, and
  delivering a product from raw material to the
  final customer.
• Managers lacking accurate total cost information
  make decisions that favor their own companys
  financial performance when making trade-offs
  within the supply chain.

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Availability Of Logistics Information
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Total Supply Chain Cost

• Total supply chain costs are the sum of all costs
  incurred in planning, designing, sourcing,
  making, and delivering a product from raw
  materials to the final customer.

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SC Measures Activity Based Costing

• Activity based costing links costs directly to
  the activities that drive them.
• ABC costing requires process transparency and
  detailed information on products, customers,
  activities, and resource costs.

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Activity-Based Costing
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Supply Chain Performance Measures

• Superior supply chain performance moves beyond
  simple functional excellence.
• New measures are required to facilitate
  collaboration throughout the entire supply chain.

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Characteristics of Effective Measures

• Aligned with organizational goals
• Aligned with project goals
• Customer oriented
• Meaningful to workers, managers, customers
• Consistent across appropriate functions or
  departments
• Promotes cooperative behavior both horizontally
  vertically
• Communicated to all relevant individuals
• Simple, straightforward, understandable

• Easy to collect the needed data
• Easy to calculate
• Available on a timely basisreal time when
  possible
• Strategic and tactical
• Quantifiable
• Designed to drive appropriate behavior
• Designed to drive learning continuous
  improvement
• Designed to provide information that is actually
  used in decision-making

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Supply Chain Performance Measures
SC Inventory Days of Supply Total number of days of inventory required to support the supply chainfrom raw materials to the final customer acquisition. Expressed as calendar days of supply based on recent actual daily cost of sales
Supply-Chain Response Time The theoretical number of days required to recognize a major shift in market demand and increase production by 20 percent
Total Supply Chain Cost The sum of all the costs incurred in planning, designing, sourcing, making, and delivering a product broken down for each member of the supply chain
Cash-to-Cash Cycle Time The time required to convert a dollar spent to acquire raw materials into a dollar collected for finished product. (Total Inventory Days of Supply Days Sales Outstanding Days Payables Outstanding).
Perfect Order Fulfillment A perfect order is an order that is delivered complete, on time, in perfect condition, and with accurate and complete documentation. Fulfillment is the percent of orders that are perfect (Perfect orders/Total orders).
Inventory Dwell Time The ratio of days inventory sits idle to days inventory is being productively used or positioned
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Supply Chain Performance Measures
Source/Make Cycle Time The cumulative time to build a shippable product from scratchif you start with no inventory on hand or on order. Consists of total sourcing lead time, release-to-start build, total build cycle time, and complete build-to-ship time
Customer Inquiry Response Time The average elapsed time between receipt of a customer call and connection with the appropriate company representative
Customer Inquiry Resolution Time The average elapsed time required to completely resolve a customer inquiry
Order Fulfillment Cycle Time The average actual lead times consistently achieved, in calendar days, from customer order to customer delivery. Includes, order authorization to entry, entry to release, release to shippable, shippable to customer receipt, and receipt to customer acceptance
On-Shelf In-Stock Percentage The percentage of time that a product is available on the shelf, rack, or wherever the customer expects to find and buy it. Measures the supply chains ultimate ability to satisfy the end customer
Value-Added Productivity Total company revenues generated less the value of externally sourced materials expressed as a ratio of total company headcount
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Supply Chain Performance Measures

• Measures of supply chain performance
• Supply chain inventory days supply
• Supply chain response time
• Total supply chain costs
• These measures allow for identification of
  inefficiencies throughout the entire supply chain.

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Cash-to-Cash Cycle Time
Cash-to-Cash Cycle Total Inventory Days of Supply Days Receivables Days Payables Cash-to-Cash Cycle Total Inventory Days of Supply Days Receivables Days Payables Cash-to-Cash Cycle Total Inventory Days of Supply Days Receivables Days Payables Cash-to-Cash Cycle Total Inventory Days of Supply Days Receivables Days Payables Cash-to-Cash Cycle Total Inventory Days of Supply Days Receivables Days Payables Cash-to-Cash Cycle Total Inventory Days of Supply Days Receivables Days Payables Cash-to-Cash Cycle Total Inventory Days of Supply Days Receivables Days Payables Cash-to-Cash Cycle Total Inventory Days of Supply Days Receivables Days Payables Cash-to-Cash Cycle Total Inventory Days of Supply Days Receivables Days Payables

Sales Inventory Receivables Payables Inventory Days Days Receivable Days Payables C2C Cycle
Dell 39,667 358 3,142 10,201 3.29 28.91 93.87 -61 days
HP 73,061 6,065 19,030 21,893 30.30 95.07 109.37 16 days
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Perfect Order Busters

• Order-entry error
• Ordered item is unavailable
• Incomplete paperwork
• Picking error
• Customer deduction
• Damaged shipment
• Overcharge error
• Error in payment processing

• Missing information
• Late shipment
• Inability to meet ship date
• Early arrival
• Inaccurate picking paperwork
• Invoice error
• Credit hold

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SC Measures - Scorecards

• Process encompasses objectives, measures,
  targets, and action plans.
• Typical scorecard emphasizes cost, quality,
  delivery, responsiveness, and innovation.
• Provide mechanism for evaluation and
  communication of performance along critical
  dimensions.

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SC Measures - Scorecards

1. Help companies select and monitor both suppliers
   and customers
2. Support recognition programs
3. Benchmark leading-edge practices
4. Disseminate best practices throughout the supply
   chain
5. Identify deficiencies that can be overcome
   through continuous improvement efforts

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Supplier Scorecard
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Benchmarking

• The formal process of comparing the attributes of
  one organization to those of another.
• Process consists of
• Define attribute to be benchmarked and identified
  a best in class comparison company.
• Document the best in class process at strategic
  and operational levels. Compare with current
  practice specifying any and all differences.
• Develop a strategy, complete with specific
  methods, for adopting best practices.

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Benchmarking - Types

• Competitive Benchmarking evaluating best
  practices of leading competitors within industry.
• Noncompetitive Benchmarking evaluating best
  practices regardless of industry.
• Internal Benchmarking - large global firms may
  find opportunities to disseminate best practices
  within the organization.

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Benchmarking - Caveats

• Effective benchmarking depends on the competitive
  attitude of management.
• Benchmarking alters managers perception of their
  own companys performance.
• Active benchmarkers are more likely to recognize
  deficiencies.
• High performing SC companies are likely to be
  active benchmarkers.

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A Return to the Opening Story

• Based on what you have now read and discussed
• What issues have led to Olympus measurement
  problems? Are these unique to Olympus?
• What else needs to be on the list? What are the
  important roles of a measurement system?
• How would you suggest the task force create a
  world-class measurement system?