L02_PerformanceMeasures

8/19/2019 L02_PerformanceMeasures

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© Warren H. Hausman

Prof. Warren H. Hausman

Integrated Supply Chain

Performance Measures Rev. 4/10


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Why be concerned about Metrics?

Service Metrics

Asset Metrics (Inventory) Time/Speed/Flexibility Metrics

Other Metrics

Summary

Outline of Session:


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Why Worry About Metrics?

Performance measures drive performance!

Facilitates incentive setting for cross-functional

collaboration and integration ... crucial in designfor supply chain management.

Facilitates negotiation and resource deployment

in cross-company collaboration and integration ...crucial in coordinated planning and in industryintegration initiatives.


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With What Should They Align?

The business strategy

The true reward structure (must Walkthe Talk)

… hence it s risky to presentgeneric

”

metrics!


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Customer Service

Assets (Inventory, Capacity)

Time/Speed/Flexibility

Generic Supply Chain Metrics:


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Service

Inventory

Goal

High

Low

Poor Good

Tradeoff Curve Metric:


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Service

Inventory

Goal

High

Low

Poor Good

Improved Tradeoff Curve :


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Service Metrics: Build to...

Stock | Order

Line Item Fill RateOrder Fill Rate% On-Time DeliveryBackorders: #, Value

Aging of Backorders:

time

frequency

Quoted Response Time% on-time completion% On-Time DeliveryLate Orders: #, Value

Aging of late Orders:

time

frequency

Quality

Accuracy ...


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100% Fill (complete order)

On-Time Delivery

Error-Free Documentation Damage-Free Goods

Quality as Expected

The Perfect Order:


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0days early days late

Window

OrdersFilled

100%

0% A

B

Order Window Metric


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Inventory Metrics:

Value ($ or other currency)

Time Supply (Days, Weeks of Supply)

Turns = COGS/Inventory Investment

Active Learning: Want Total Inventory orInventory By Component?

Raw Material

Work In Process (WIP)

Finished Goods

A l T d ff M i h


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Apply Tradeoff Metrics to the

Entire Supply Chain:

Us

Our SupplyChain

Competitor ’s

Supply Chain

Service

ChainInventory

End-Customer Service

Service

Competitor


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“GM Tells 1,100 Dealers ItPlans to Drop Them”*

Our SupplyChain

Competitor ’s

Supply Chain

ChainInventory

End-Customer Service*N.Y. Times, May 15, 2009


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Time/Speed/Flexibility Metrics:

Quoted Customer Response Time

Cycle/Flow Time at a Node

Supply Chain Cycle Time (sum alllead times)

Cash Conversion Cycle (Cash-to-Cash):

Inventory + A/R - A/P , measured indays


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Example: Company XYZ

Time Period: Q3 Q4 Q1 Q2

On-Time Delivery 69% 76% 76% 58%

Inventory Turns 4.0 4.4 5.4 6.9

S.C. Cycle Time (days) 233 202 186 172

Cash-to-Cash Cycle (days) 111 93 83 73


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Dell’s Cash-to-Cash Cycle

Days of sales outstanding (A/R) 42

Days of supply in inventory 11

Days in accounts payable (A/P) (84)

Cash-to-Cash Cycle: (31)

Source: Dell Q3-FY12 Report


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Market Capitalization metric:

Convert Savings and RevenueEnhancements to Annual Profit

Use Price/Earnings Ratio to Convert toMarket Capitalization

Billions of Dollars can result!


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RUN TIME

How About Utilization?

UTILIZATION0% 100%

CYCLE TIMEOR

FLOW TIME WAIT TIME

If forecast error or process variability exists:


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Problems with Narrow Metrics:

Labor Productivity at XXX Motor Company

Two Attendants, Two Presses: $20 Million output

One Attendant, Two Presses : $15 Million output

Labor Productivity increased from $10 Million/year to $15Million/year per worker

But they needed to buy another press (with anotherattendant) to get the output they required!


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ROA (Return on Assets): After-Tax Profitability/AssetsUsed

EVA (Economic Value Added): adjusts Profits by chargefor invested capital

Both attempt to reduce two-dimensional Tradeoff Curve to

a single dimension (% or $)

What do you lose by this?

ROA/EVA Metrics


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Ratio:

Standard Deviation of orders / Standard

Deviation of sales or sell-through

(Typically > 1; ideally close to 1)

Bullwhip Metric:


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Ideally, metrics on Markdowns and Stockouts(high costs in retail) – which are harder totrack?

Retail Metrics:


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“Merchandising managers are responsiblefor gross margins on the products they pick- which means they, not store managers,own their inventory …”

Nordstrom’s Dept. Store

Source: Fortune 9/28/98, p. 156.


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“In November [2005], Mr. Hurd changed howH-P salespeople are compensated. [Oldsystem: revenue.] … Mr. Hurd also linked

commissions to the prof i tabi l i ty of theproducts sold.” [emphasis added.]

HP: Overhauling Sales Metrics*

*Wall St. Journal, 4/3/06


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“The Patent Office itself gets paid when itgrants a patent … Examiners’ bonuses arebased in part on the number of files they

close in a year …the only way to close afile for good is to grant the patent becausean application that’s been denied canalways be modified and resubmitted, andfrequently is.”

U.S. Patent Office Metrics*

*Wall St. Journal, 3/29/06. USPTO implemented a new work creditsystem in March 2010.


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Reduced Carbon Footprint

Reduced Energy Consumption

Reduced Resource Consumption

“Green” Packaging

Reduced Pollution

… More?

“Green/Sustainability” Metrics


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Allows dynamic pricing by time of day

Most cities use to maximize revenue

San Francisco will adjust rates dynamicallyto keep 15% of spaces free

Why would they do that?

San Francisco “Smart” Parking Meters


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Summary - Good & Bad Metrics

Service, Off-the-Shelf:Line Item Fill Rate X

Complete Order Fill Rate X

# SKU's on Backorder X

Availability X

Total $ Backordered XAging of Backorders X

Service, Build-to-Order:Order Response Time X

% On-Time Delivery X

Order Aging X

Response to Inquiries X

Inventory Assets:Total $ Value X

Turns X

Weeks of Supply X

RM/WIP/FG Breakout X

GOOD BAD(Misuse)

S M G d & B d


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Summary - More Good & Bad

MetricsGOOD BAD

(Misuse)

Service And Inventory:Tradeoff Curve (at a node) X

Tradeoff Curve for the Chain ?

Time/Speed/Flexibiilty:Quoted Customer Lead Time X

Cycle Time at a Node X

"Cold Start" time to fill an order XCash to Cash Cycle Time X

"Upside" Flexibility X

Manufacturing:Cycle (flow) Time X

Utilization X

Cost per Insertion X

% Actual = Plan XBusiness-Unit Measures:

Return on Assets (ROA) X

Economic Value Added (EVA) X

Total Landed Cost ($) X

Net Margin (%) X

Profit ($) X

L02_PerformanceMeasures

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