SCM Metrics-Presentation 4

By

K. Sashi Rao

Management Consultant

Presentation 4- Coverage

Supply Chain AnalyticsOverall SCM Performance Metrics

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Supply Chain Analytics

Business Analytics (BA)

BA makes up the skills, technologies, applications and practices for continuous iterative exploration and investigation of past business performance to drive business planning

A fundamental basis is to use past time series data analysis BA is also seen as the ability to see patterns in vast amounts

of data and extract actionable insights BA makes extensive use of data, statistical and quantitative

analysis, explanatory and predictive modeling, and fact-based management to drive decision making

Business intelligence (BI) is similar but yet different

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Forecasting Methods-time series approach(2)

Static elements: Trend Seasonal Cyclical Random

Adaptive elements:Moving averageSimple exponential smoothingExponential smoothing (with trend)Exponential smoothing (with trend and seasonality)

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Time Series-static elements

Trend component- persistent overall downward or upward pattern; due to population, technology or long term movement

Seasonal component- regular up and down fluctuations due to weather and/or seasons whose pattern repeats every year

Cyclical component- repeated up and down movements; due to economic or business cycles lasting beyond one year but say every 5-6 years

Random component- erratic, unsystematic, residual fluctuations due to random events or occurrences like one –time drought or flood events

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Time Series Patterns(1)

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97,2

97,3

97,4

98,1

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00,1

Time Series Patterns(2)

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1 2 3 4 5 6 7 8 9 10 11 12

Period

Demand

Dt

Dt-bar

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Time Series Patterns(3)

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Time Series Patterns(4)

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Business Intelligence (BI)

BI traditionally focuses on using a consistent set

of metrics to both measure past performance

and guide business planning

BI is querying, reporting, online analytical

processing (OLAP) and providing ‘alerts’

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BI and BA

BI answers the questions of ‘what happened; how many, how often, where; where exactly is the problem; what actions are needed

BA can answer questions of ‘ why is this happening; what if these trends continue’ what will happen next, what is the best that can happen

Supply chain analytics is a subset of BA

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Supply Chain Analytics

Extracts, analyses and presents SC performance data to provide measurement, monitoring, predictive/analytical modeling, forecasting and SC management

Identifies trends, performs comparisons and highlights opportunities in SC functions even when large amounts of data are involved

Leverages investments in IT enterprise solutions, web technologies, data warehouses and locates patterns amongst transactional, demographic and behavioral data

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Supply Analytics Usefulness

Enables monitoring on end-to-end basis

Covers all SC functions and processes

Alerts problems and exceptions by predefined thresholds, alerts and triggers

Ensures data visibility and transparency

Serves as the performance ‘dashboard’

Identifies problems for trouble shooting

Becomes an analytical decision making tool

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Supply Analytics Benefits

Reduces direct and indirect costs and improve profitability

Enables holistic view by consolidating data from multiple systems

Applies algorithms and decision rules for meaningful procurement information

Minimizes risks of SC disruptionsMaps bought products-suppliers matrix to focus on

supplier-positioning and supplier-perception modelsSupports supplier management decisions on optimal

sourcing strategiesStreamlines SCM thro’ collaborative processes for

information exchange across SC partners

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Overall SCM Performance Metrics

Overall SCM Performance Metrics

All discussions so far on ‘micro’ perspective on SCM metrics

Now, to take a ‘macro’ perspectiveSimple macro model is to look at overall SC operational

costs- less the better !But cutting ‘ too much fat’ can lead to ‘loss of muscle !Cost focus only while gives short term profitability, could

go against desirable market positioning and building competitive advantage

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SCOR/BSC Models revisited

SCOR as a cross-industry and process reference model enables SC performance and benchmarking

It draws attention to process gaps for improvements rather than specific departmental performance

SCOR does not include Marketing and Sales( demand generation), R & D/ Product development and collaborative SC relationships- all now considered essential for SC success

BSC, though takes 4 perspectives( financial, customer, internal processes and learning and growth), still does not answer need for overall SC performance measures

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Seeking Overall SCM Measures

Issue not of having metrics, but choosing those that really matter !

Focus on limited critical measures avoids ‘paralysis by analysis’ !

Should set KPIs for each function and process linked to corporate goals and strategies

KPI goals set thro ‘benchmarking’ and/or SMART methodology (specific, measurable, achievable, realistic, time-bound goals)

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SCM Performance Measures revisited

Process-based measures- SCOR modelFunctional- based measures- activities/departments

assessedQCDF measures- performance across boundaries of

suppliers and customersTotal chain measures- or ‘supply chain barometer’

assessing performance of complete SC and across organizational boundaries

All these above are not mutually exclusive but different from the way they are viewed

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Process-based Measures (illustrative)

Forecasting & Demand Management- forecasting accuracy, planning efficiency, standardization index

Procurement & Supplier Management- vendor ratings, RM inventory turns, WIP, material stock-outs

Order Processing- shipment accuracy, order processing time, invoice documentation completion/accuracy

Distribution Management- space utilization index, logistics assets turnover, container utilization, warehouse picking time

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Functional-based Measures (illustrative)

Materials Management- material cost as % of sales, inventory turns, production time lost for no materials

Manufacturing Management- scrap factor, defect rate, plant utilization, % time on rework

Logistics/Transportation- GIT inventory index, cost per ton km, warehouse productivity

Sales/Customer Service- customer order cycle time, invoicing accuracy, % stock returns, speed of complaint resolution

Marketing- % sales from new products, time to market, market expansion/market shares, repeat vs. new customers

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QCDF measures (illustrative)

QUALITY-Raw material quality

-Product quality-Order entry accuracy

-Warehouse picking accuracy

COST-Material cost-Labor cost

-Overhead costs-Storage costs

-Logistics costs

DELIVERY-Order processing time

-Manufacturing lead time-Procurement lead time

-Shipment time-Warehousing picking time

FLEXIBILITY-RM inventory days-FG inventory days-GIT inventory days

-Distributors inventory days

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Post-process and Process Measures

All performance measures can be looked at as post-process or process types

Post-process measures are based on past performance data usually from annual reports/data bases( eg.inventory measures)

Process measures are as in SCOR model

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Evaluation of SCM Measures

Costs, activity times, responsiveness to customers et al have all been used singly or jointly

Weaknesses in each such individual measure is lack of inclusiveness, universality, measurability and consistency

Using low cost as a measure can show up elsewhere as poor customer response time or inflexibility to meet demand fluctuations

Performance measures not always well linked to corporate goals( EVA can distort what managers do for their own benefit vis-à-vis of the firm)

In situations of uncertainty and/or economic downturns, measures unable to correlate effort and performance( though supply chain analytics may give deeper explanations/reasons)

Hence, need for total SCM measures as well

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Total SCM Measures

Total SCM costs- cost of all SCM functions as % of gross sales covering managing of material, information and fund flows( cost focus)

Delivery performance to customer request-% orders fulfilled on or before required (customer focus)

Cash to cash cycle time- number of days between paying for raws and receiving from customer( inventory/working capital focus)

Value added productivity per employee- =(sales –cost of goods sold)/ number of employees( management efficiency focus)

Upside production flexibility- days required to meet + 20% unplanned demand on sustained basis( SC flexibility focus)

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Total SCM Measures using Financial Data

Such data easier to get thro company websites and open data bases (eg. ‘Prowess’ data base of CMIE)

Total supply chain length-(RM+WIP+ FG) inventory days of annual sales; lower the better

Supply chain inefficiency ratio- measures relative efficiency of internal SCM; lower the better

Supply chain working capital productivity- higher the better

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Supply Chain Inefficiency (SCI) Ratio

SCI= SCC/NSSCC= DC+(INV x ICC)Where:SCI= Supply Chain Inefficiency RatioSCC= Supply Chain Costs (Rs)DC= Distribution Cost (annual) (Rs) INV=Inventory Value( RM+WIP+FG) as of date

(Rs) ICC=Inventory Carrying Cost( typically 20% of inventory

value or as 0.20 in above equation)NS= Net Sales( annual) (Rs)

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Supply Chain Working Capital Productivity (SWCP)

SWCP= NS/SWCSWC= INV+(AR-AP)Where:SWCP is Supply Chain Working Capital Productivity

(Ratio)SWC= Supply Chain Working Capital (Rs) INV= Inventory (all) Value (Rs)AR= Accounts Receivables (excluding loans and

advances) (Rs)AP= Accounts Payables (Rs)NS- Net Sales (Rs)

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Linking SCM Measures to Business Performance Cost reduction achieved by Reducing inventory Reducing logistics expenses Reducing direct and indirect material expenses Improving revenue and profitability by Selling higher margin products Achieving higher market share Reducing backorder and lost sales Attacking new markets Decreasing supply time to market Improving operational efficiency by Reducing procurement expenses Increasing asset utilization Delaying capital expenditure Reducing working capital by Reducing inventory Reducing accounts receivables

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Enhancing SC Performance

Balance between cost and customer serviceSC optimization- improving SC elements like demand

management, forecasting, inventory control, and transportation efficiency amongst others

SC integration- better intra- and inter- firm integration thro’ improved organizational structures and processes

SC restructuring- major changes in supply chain configurations for all flows especially for new products

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Achieving SC Excellence

Make cultural and attitudinal change (beyond mere metrics)

Break organizational barriers thro’ better communication, coordination and collaboration

Bring about transparency and visibility

Manage thro metrics and analytics

Enable faster, improved, data-based decision-making

Achieve agility and flexibility thro better responsiveness to external (sourcing/market/competition) and internal (supply processes and systems) factors

Use networking tools like VMI, EDI, CPFR, joint cost reduction and vendor development programs

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Executing SC Excellence

Value impact analysis- evaluating metrics to identify KPIs

Blueprint for future- identifying corporate goals/strategies to suitably configure SC elements for performance

Roadmap for success- building blocks and steps towards the blueprint

Implementation- actually executing plans with time-bound milestones and targets

Measurement/feedback- tracking metrics, periodic reviews and corrective actions

Ultimately, all improvement moves should lead to superior SC performance and consequent successful business performance

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Thank you

All the very best