Supply Chain Management: From Vision to Implementation

Chapter 13: Performance Measurement

2

Chapter 13: Learning Objectives

1. Describe the role of measurement in shaping a company’s 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.

3

Chapter 13: Learning Objectives

4. Identify and implement appropriate measures to manage and monitor important processes and relationships. Create unique, tailored measures.

5. Benchmark performance measures and leading-edge SC practices.

4

Role of Performance Measurement

When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates.

- Thomas Monson

5

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:

1. Customer requirements

2. Company and supplier capabilities

3. Probable success of collaborative initiatives

6

Measurement Drives Behavior

Measurement is more critical than communication, training, or perhaps anything else when it comes to managing human behavior.

Measurement’s influence on behavior is pervasive because people pay attention to how they are measured.

Managers must adopt measures that truly promote collaborative behavior.

7

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.

8

Traditional Measurement

Areas that are essential to measure to accomplish customer service and profitability goals:

1. Asset Management

2. Cost

3. Customer Service

4. Productivity

5. Quality

9

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

10

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

11

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.

12

Measures of Cost

Sourcing Operations LogisticsUnit priceAcquisition costTotal cost of

ownershipCost as a percent of

salesAdministrative

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

13

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.

14

Measures of Customer Service

Sourcing Operations LogisticsOn-time deliveryOrder to delivery

cyclePercent shipments

expeditedResponse 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

15

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.

16

Measures of Productivity

Sourcing Operations LogisticsPurchase orders per

employeeDollar spend per

employeeCommodity teams

per employeePercent 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

17

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

18

Measures of Quality

Sourcing Operations LogisticsShipments rejectedDefect rate—parts

per millionPercent suppliers

certifiedPercent orders from

certified suppliersResponse to inquiry

Defect rate—parts 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

19

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.

20

Contemporary Supply Chain Measures

Measurements consistent with supply chain management core principles emphasize:

Goal alignment Customer satisfaction Process integration Total costs Inter-organizational collaboration

21

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.

22

SC Measure Alignment - Traditional

23

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.

24

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

25

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 company’s financial performance when making trade-offs within the supply chain.

26

Availability Of Logistics Information

27

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.

28

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.

29

Activity-Based Costing

30

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.

31

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 basis—

real 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

32

Supply Chain Performance MeasuresSC Inventory Days of Supply

Total number of days of inventory required to support the supply chain—from 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

33

Supply Chain Performance MeasuresSource/Make Cycle Time

The cumulative time to build a shippable product from scratch—if 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 chain’s 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

34

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.

35

Cash-to-Cash Cycle Time

Cash-to-Cash Cycle = Total Inventory Days of Supply + Days Receivables – Days Payables

Sales Inventory Receivables PayablesInventory

DaysDays

ReceivableDays

PayablesC2C 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

36

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

37

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.

38

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

39

Supplier Scorecard

40

Benchmarking

The formal process of comparing the attributes of one organization to those of another.

Process consists of:1. Define attribute to be benchmarked and identified a

best in class comparison company.2. Document the best in class process at strategic and

operational levels. Compare with current practice specifying any and all differences.

3. Develop a strategy, complete with specific methods, for adopting best practices.

41

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.

42

Benchmarking - Caveats

1. Effective benchmarking depends on the competitive attitude of management.

2. Benchmarking alters manager’s perception of their own company’s performance.

Active benchmarkers are more likely to recognize deficiencies.

3. High performing SC companies are likely to be active benchmarkers.

43

A Return to the Opening Story

Based on what you have now read and discussed:

1. What issues have led to Olympus’ measurement problems? Are these unique to Olympus?

2. What else needs to be on the list? What are the important roles of a measurement system?

3. How would you suggest the task force create a world-class measurement system?