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Performance metrics

Drive Supply Chain Excellence Through

By Yatish Desai

To transform supply chain effectiveness, performance measurement must be a focus of continuous improvement.

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However, many forward-looking companies are now evaluating their supply chain organizations based on value creation — from revenue generation to brand equity enhancement — and not just cost reduction. Instead of discrete functions, the supply chain is seen as a flexible, integrated set of cross-functional processes and roles that involve planning, sourcing, making and delivering, as well as ensuring customer service, quality and successful new product launches.

As a result, supply management pro-fessionals can actively design structures, systems, processes and methodologies to

respond to changing requirements. They can also replicate, scale and continually build on best practices in a sustainable way — moving beyond one-time suc-cesses while supporting the long-term strategic goals of the organization. As market complexities and dynamics con-tinue to increase, these enhanced new metrics are needed to support continuous supply chain transformation.

By using updated metrics, supply man-agers can find new ways of looking at the same information they’ve been tracking for years to develop a more meaningful measurement of supply chain performance that includes a broader understanding of business and financial implications.

Moving Toward Efficient and Effective Supply Chains

Performance metrics supporting supply chain performance can help organizations better adapt to changing business conditions, meet their strategic goals, help ensure stake-holder satisfaction and build the business according to plan. A sustainable transforma-tion program starts with a leader working with the team to understand the various factors that lead to strong performance in the supply chain. Supply management teams must identify the hallmarks of their own supply chains to make them more effective.

The first step in driving a sustainable

transformation program is making a dis-tinction between supply chain efficiency and effectiveness. Supply chain efficiency can be defined as the comparison of what is actually produced or performed against what can be achieved with the same con-sumption of resources such as money, time and labor. Efficiency is focused on doing things better in the current state with greater emphasis on tactical work. As such, efficiency is an important factor in mea-suring productivity.

For example, consider a labor workforce that manufactures 70 widgets per hour versus a standard target of 100 widgets per hour. Because the labor workforce is only 70 percent productive, there are opportunities

to increase labor efficiency through methods such as better training or automation. In another example, an employee is paid to work eight hours per day, but only works six hours per day once meetings and lunch breaks are removed from the total. To improve employee work efficiency, the com-pany might consider ways to reduce the time involved in meetings and/or alternatively reduce the duration of the lunch break.

Supply chain effectiveness is the degree in which objectives are achieved and the extent to which targeted problems are solved. In contrast with efficiency, effectiveness is determined by what is needed strategically to change or transform the current state. In short, efficiency means “doing the thing right,” and effectiveness means “doing the right thing.” More specifically, effective-ness means that an organization is able to meet objectives and satisfy stakeholders and customers by managing its supply chain

in an agile manner. Thus, the focus is on how something is done rather than which employees are handling each task.

This distinction between efficiency and effectiveness can, in turn, be used to develop a three-stage continuum to achieving supply chain improvement and transformation, as illustrated on page 39.

Elemental. In the elemental stage, the supply chain stabilizes the flow of goods required by the com-pany. Basic,

The first step in driving a sustainable transformation program is making a distinction between supply chain efficiency and effectiveness.

S upply chain organizations have traditionally used performance measurements to help demonstrate and improve the value a department or employee delivers to the organization. This view of performance measurement is often based on the tradi-tional image of the supply chain as a delivery system limited to discrete functions,

such as materials management, logistics, procurement and manufacturing. Accordingly, cost and its related issues are usually the focus of most performance management metrics.

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foundational elements with essential pro-cesses are in place, but they might operate in functional silos with a minimal level of integration across the organization. Rationalization of business plans is tactical rather than strategic in nature, and the supply chain tends to work in a reactive or firefighting mode. From the talent stand-point, there is often an overreliance on tribal knowledge and poor planning, and execution typically leads to waste.

Efficient. At the efficient stage, the supply chain moves from stabilization to optimization. This involves minimizing operating costs and employed assets, sup-porting compliance and attempting to gain competitive advantage through operational productivity and profitability. However, the supply chain is still hampered by inconsistent and nonstandard processes for

performing business functions, as well as poor control and management oversight across the supply chain. Transactional, material, informational and financial activities across core processes need to be dramatically improved.

Effective. The effective stage is characterized by a fundamental, end-to-end transformation of the supply chain. Organizations now focus on high-quality, cost-effective, profitable supply chain per-formance, not mere compliance. They also identify and exploit value creation through economies of scale and innovative oper-ating models.

At this stage, the supply chain is incor-porated into the organization’s business strategies. Traditional silos of processes and knowledge are broken down, and both staff and supply managers can col-laborate across functions to support the

integrated operating business model of the organization, extending the reach to trading partners such as suppliers, contracted manufacturers and channel distributors.

Key MetricsEach stage of supply chain development

has distinctly different metrics for perfor-mance management.

Metrics at the elemental stage are cen-tered on costs specific to each function. Examples include:• Manufacturing (unit cost, labor cost and

plant utilization)• Sales and marketing (market share and

revenue growth)• Engineering and R&D (labor and mate-

rials cost, change management cost and time to launch).

Efficiency metrics are broader in scope but are not linked to financial key perfor-mance indicators (KPIs) or the strategic objectives of the organization. Examples include:• Headcount (salaried, waged and

contracted)• Indirect spend• Facilities and asset cost management• Cost of quality• Tax effective rates for supply chain• Continuous improvement

program spend.

Effectiveness metrics represent a quantum leap in integration, visibility and alignment with overall supply chain per-formance. In the effective stage, the focus shifts from discrete functions to integrated processes. Metrics are multidimensional and span the entire supply chain, including

suppliers and customers. Metrics are also aligned with the company’s business model, business plan and overall objec-tives. They cascade from organizational performance, to departmental perfor-mance, to individual performance. In addition, they are linked to financial KPIs.

Based on these metrics, supply managers can develop an integrated, single view of supply chain performance across functions and hierarchies. They can map processes and roles in the supply chain to key metrics and align metrics with financial performance. With mechanisms in place to periodically review actual supply chain performance, measures can be redefined in light of changing business goals and requirements.

Effectiveness metrics involve areas such as services, assets and speed/velocity, with each of these areas related to the

others across the supply chain. Examples of services-based metrics include: • Lead time reduction and reliability• Perfect order fulfillment• Customer satisfaction• Supplier collaboration.

Examples of asset-based metrics include:• Return on supply chain fixed assets (net

income/total assets)• Asset utilization (capacity and space

utilization)• Revenue on operating assets• Total supply chain costs.

Examples of speed/velocity performance include:• Inventory turn increase (COGS/

inventory)• New product development cycle time

reduction (ROI on NPD)

Effectiveness metrics involve areas such as services, assets and speed/velocity, with each of these areas related to the others across the supply chain.

Performance metrics

Drive Supply Chain Excellence Through

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Elemental“Stabilize”

Efficient“Optimize”

Effective“Transform”

This illustration details the three-stage continuum to achieving supply chain improvement and transformation.

Integrated Performance Measurement Stages

• Capacity ramp-up• Demand forecast accuracy.

Development and transition to an effec-tive operating model requires building new organizational capabilities to support the strategic objectives. One of the key con-stituents of this model is having the right talent pool with the right skill sets to handle the challenges inherent in the transforma-tion process. In addition, the communica-tion of performance management systems — both internally and externally — is also vital and should be a key part of organiza-tional culture. Performance management should be geared toward talent retention and development that includes technical and business-level skills, especially when respon-sibilities break down to include business decision-making.

For supply management professionals in particular, the focus should be on striking a balance between quantitative metrics such as forecast accuracy and on-time in-full (OTIF) delivery, and qualitative metrics involving change management, project management, technology enablement and governance.

Benefits for OrganizationsWith performance metrics supporting

effectiveness, organizations can eliminate functional silos and create results-oriented, multifunctional teams. Employee produc-tivity may increase when individuals are able to make informed decisions based on root cause analysis and factual accurate data.

In the same way, supply managers can quickly determine the root causes of supply chain failures to help identify and implement required changes. Supply

managers can also improve their under-standing of how activities at multiple tiers are related and collaborate with each other. For both supply managers and staff, feedback mechanisms can help increase understanding and commitment to strategic goals, helping recognize the importance of each individual’s role in the wider context of the supply chain and the organization as a whole.

Transforming the supply chain based on effectiveness involves a paradigm shift for organizations and cannot be accomplished overnight or without support from the top. However, it can represent a true value dif-ferentiator for companies, which can be critical in today’s environment. Ism

Yatish Desai is a director in KPMG Advisory’s Business Effectiveness Group

in Cleveland. For more information, send an email to author@ism.ws.

• Industry laggard and risk-averse• Focus on getting out of “firefighting” mode• Unstable and unaligned processes and

operating infrastructure• Value lock-up

Integrated Performance MeasurementLow High

Valu

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• Typically industry follower• Focus on functional compliance

and value optimization• Minimize operating costs and

employee assets

• Industry leader• Focus on high-quality, cost-effective,

profitable supply chain performance• Exploits value through economies of scale• Integrated and novel operating model• Value accelerator

© Institute for Supply Management™. All rights reserved. Reprinted with permission from the publisher, the Institute for Supply Management™.