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Supply Chain Metrics: Make Sure They Are Aligned with Your Strategy!

Many people are talking about Key Performance Indicators, Metrics, Analytics, and other indicators of performance.  The importance of selecting the right metrics or “measures” as I prefer to call them, is critical as we all know that metrics drive behaviors.  Rather then selecting a plethora of meaningless metrics, it is always better to focus on a critical few, and select them wisely.  Here are a few guidelines I’ve encountered over the years that might help people think more about selecting and establishing metrics for your supply chain.

Step 1 – Translate Organizational Objectives Into Supply Chain Metrics

Before beginning to establish supply chain metrics, managers must first take the time to ensure that they fully understand key organizational objectives. Once these are understood, they can be translated into specific facility, process, functional, or business unit objectives, which can then be defined in terms of metrics.

Company objectives are generally set by an executive leadership team, and consist of a broad set of objectives that are communicated along with quantifiable objectives. If this is a public company, these objectives are often communicated to shareholders in the company’s annual report, and may consist of specific quantifiable elements such as revenue growth, return on assets, etc. However, underlying these quantitative measures typically imply an implicit set of company-level and business unit-level objectives that support these results.

in defining how the company  will compete and succeed in the global environment, the leadership must clearly and succinctly communicate the following to their business unit team leaders:

  • What markets will the firm compete in, and on what basis?
  • What are the long-term and short-term business goals the company seeks to achieve?
  • What are the budgetary and economic resource constraints, and how will these be allocated to functional groups and business units?

When faced with these challenges, business units must then work together to define their functional strategies, which are a set of short-term and long-term plans that will support the enterprise strategy.

Next, the leadership within the business unit must understand its key markets and economic forecasts, and provide a clear vision on how the enterprise will differentiate itself from its competitors, achieve growth objectives, manage costs, achieve customer satisfaction, and maintain continued profitability in order to meet or exceed the expectations of stakeholders. Once this is understood, these objectives must be clearly communicated to plant leaders, and expressed in terms of order winners and qualifiers.

In effect, a champion form the leadership team must clearly define the supply chain team’s task based on their understanding of order winners and qualifiers. Once defined, that objective will be used to drive performance objectives for specific individuals in the facility, and ensure that everyone understands the objective.

Step 2 – Develop Metrics and Data Sources

A major output of the first phase of the metrics development process is a set of functional strategic objectives, including business unit or supply chain management strategic objectives. As supply chain managers interact with other members within their business, as well as with corporate executives, a major set of strategic directives should begin to emerge. These strategic objectives may or may not provide details concerning how they are to be achieved. However, the process is not yet complete. Unless supply chain management executives can effectively translate broad-level objectives into specific functional or plant-level management goals, these strategies will never be realized.

Senior management must couple each objective with a specific goal that it can measure and act upon. These specific goals become the initial step for development of a metrics system. The following are examples of corporate-wide management objectives associated with various supply chain management goals.

Cost Reduction Goal

  • Be the low-cost producer within our industry. (Goal: Reduce material costs by 15% in one year.)

Inventory Goal

  • Reduce the levels of inventory required to supply customers. (Goal: Reduce raw material and WIP inventory to 20 days’ supply or less.)

New Product Introduction

  • Reduce product development time. (Goal: Introduce new products in half the time accomplished on the last iteration.)

Quality Objective

  • Increase quality of services and products. (Goal: Reduce average defects by 200 ppm on all material receipts within one year.)

This level of detail requires translating companywide  management goals into specific supply level or plant-level goals. Note that each metric may be further broken down into metrics that apply across all products within a facility, or may be assigned or designated to specific processes or product lines within the facility.

Once each metric is identified, then it must be defined in terms of the data that will be used to track the measure. For instance, a quality measure such as parts per million refers to the number of defective products found for each million produced. However, this does not define what a defect is.. This may require further defining the manufacturing specification that constitutes whether it is in tolerance or not, or it could mean whether the product is tested at the end of the line and operates as it was designed to. Another example is “on-time delivery”. This could refer to the time when the product was requested by the customer for delivery originally, or the time that was “negotiated” with the customer because the original due date could not be met. Each metric must be defined carefully, and the source of data (whether from the MRP system, the accounting system, etc.) must be identified and formally documented.

Step 3 – Develop a Balanced Scorecard

Once management has defined a set of different metrics, there is a need to ensure that the scorecard is “balanced”, and the different metrics are weighted properly to achieve the overall optimal outcome.

The balanced scorecard was first presented by Robert S. Kaplan and David P. Norton in 1992. The original premise was that a total reliance on financial measures was leading organizations to make poor decisions. Kaplan and Norton argued that firms must go beyond financial measures, which are lagging indicators, and utilize measures that are leading indicators of performance.

They further suggested that the most appropriate measures that would cause organizations to do the right things would be those metrics that measure the strategy of the firm, its functional activities, and processes.

According to Kaplan and Norton, the balanced scorecard included four key linked performance measurement areas:

  1. How do customers see us? (customer satisfaction perspective)
  2. What must we excel at? (operational excellence perspective)
  3. Can we continue to improve and create value? (innovation perspective)
  4. How do we look to shareholders? (financial perspective)

In addition, Kaplan and Norton stressed that measurement itself is not the objective. Measurement and specific metrics provide clarity to general statements and a strategy focus around which to provide performance recognition and rewards.

The balanced scorecard and its related ideas have been adapted by numerous companies and applied to purchasing and supply.

An example of a supply chain scorecard will similarly consider the metrics and assign the right weight to each metric, considering:

  1. How do we look to shareholders? (financial perspective)
  2. How do our customers see us? (internal and external perspectives)
  3. What must we excel at? (operational excellence perspective)
  4. What do we need to do to improve? (innovation perspective)

 Based on the company’s objectives, the balanced scorecard would then be connected to a specific set of appropriate performance measurements. The result will be a scorecard by department or people with specific key performance indicators.

 Step 4 – Establish Measurement Requirements and Owners

Once the right set of metrics is established, it is then required to develop a method for tracking, communicating, and assigning responsibility for each metric.This involves identifying an easily comprehended set of graphs or tables that summarize the key metrics, one that is easy for people to understand at a glance. The team must also understand the reporting frequency, how often will each metric be updated, once a week, once a month, or once a quarter? Next, the management team must assign responsibility for each metric to each group, and explain how it is calculated. This can be a delicate activity. For example, if the demand management group is held accountable for the requested customer service date, and manufacturing and supply are also held accountable, then they are more likely to work together to achieve the metric than if one or the other were held accountable individually. Similarly, scrap and obsolescence may be a metric that is controlled by manufacturing, but is also the joint responsibility of engineering, who designs the tolerances on these products and services.

 Step 5:  Measure Current Performance and Benchmark with Best-in-Class Competitors

The final step in the supply chain metrics development process is to set targets for improvement. This involves establishing the current baseline performance for each of the metrics defined, and then comparing their performance relative to competitors. This is often known as “benchmarking”, and is an important step in performance improvement. In selecting a benchmark, it is important to select competitors who are similar to your company in size and range, and to ensure that the metrics being compared are similar to the metrics in your system. There may be a need to put together a team to study more closely why there are differences and/or gaps between metrics, and to then establish your company’s position relative to these metrics. This often requires understanding the underlying capabilities that may drive differences in performance, as well as setting interim targets for closing these gaps.