developing an overview of supply chain performance metrics process, recommendations mckinsey october...
TRANSCRIPT
LONDON
SHOP
TH
E
Developing An Overview of Supply Chain Performance Metrics
Process, Recommendations
McKinseyOctober 2003
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This document gives an overview of the different metrics that can be used to measure supply chain performance
• The Supply Chain CoE’s objective is to define a benchmarking framework capable of:
– Comparing generic metric performances for use on projects.
– Capturing further benchmarking data in a consistent format.
• The London Shop’s task:
– Develop an overview of the different metrics to measure supply chain performance.
– Select the most important metrics that can be used across industries.
– Discuss how the most important metrics link other operational metrics within each stage of the supply chain.
– Suggest how the supply chain CoE should continue concerning this topic.
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We used information from several sources during our project
• Internal and external documents:
– High level benchmarking framework for supply chain performance (H .Cook):• Shop Study (March 1997) accessing information from available experts and past projects.
– Supply chain benchmarks and best practice (Dow Polyurethane & Epoxy April 1995).
– Supply Chain Benchmark Assessment (March 1997).
– Supply chain appraisal and benchmarks: (client X September 1997).
• Discussions with supply chain CoE:
– Graham Colclough.
– Andrew Morgan.
– Lee Sherman.
– Deborah Huff (Cap McKinsey).
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Possible data sources
• CIPS (UK): Purchasing (& Supply Chain).
• APICS (US): Supply Chain.
• CAPS (US): Purchasing & Supply Chain (US & Legal):– Research Benchmark Industry Listings (http://www.capsresearch//
htm).
• NAPM (US): Purchasing.
• Kaiser Associates: Benchmark Specialist Consultant.
• US University Research: New global initiative (investigating entryopportunities—Bob Ackerman).
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Performance measurement is an important but complex subject
This document’s an initial step in the right direction.This document’s an initial step in the right direction.
Companies see the need for metrics. . . . . . but developing the “right” set of metrics is a challenge
• “If you can’t measure, you can’t manage, you can’t motivate”
• Establishing the proper measures within an organisation enhances continuous
• No commonly used “model”.
• Business issues that warrant performance measurement:
– Differ between industries.
– Differ within industry.
– Change overtime.
There is no one “right” answerThere is no one “right” answer
Focus
Accountability
Communication
Linking strategy to action
Assigning accountability
to take action when needed
Measuring progress towards goals through
interactive communication and
education
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We used a generic supply chain framework as a basis for our analysis . . .
Supply Chain Framework
Suppliers
Purchasing
Information Flow
Forecasting & Production Planning Customer Service
Inventory Management
InboundLogistics
Manufacturing
Maintenance
Marketing &Sales
OutboundLogistics
Integrated Supply Chain Management
Customers
This framework aligns with the CoE POV and is also similar to framework for the supply chain diagnostics inventory database.
This framework aligns with the CoE POV and is also similar to framework for the supply chain diagnostics inventory database.
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. . . and concluded there are three strategic objectives we should focus on when analysing the supply chain
Key metrics must give information on how a company is performing against old strategic objectives.
Key metrics must give information on how a company is performing against old strategic objectives.
Strategic objectives:Strategic objectives:
Quality
Time
Cost
Products/services according to customer
expectations
On agreed time
At reasonable cost
Purchasing
Information Flow
Forecasting & Production Planning
Inventory Management
InboundLogistics
Manufacturing
Maintenance
Marketing &Sales
OutboundLogistics
Integrated Supply Chain Management
Customer Service
Supply Chain Framework
NB: Boundaries• NPDI• Support functions
Tailor to company specific (BSC)
objectives
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We began with a brainstorming session on the key drivers for quality, time and cost
The complete picture can be found in the appendix.The complete picture can be found in the appendix.
• We looked at the supply chain from the customer’s perspective.
• We brainstormed on “what could go wrong along the supply chain”:
– What are drivers of performance from a quality, time and cost point of view.
PricePrice ServiceService Product quality
Product quality
Product quantityProduct quantity
Product delivery
Product delivery
Late arrival Late
arrival Late
deliveryLate
deliveryInventory
costInventory
costProduct
costProduct
costProduc-tion cost
Produc-tion cost
Delivery cost
Delivery cost
Customer service
cost
Customer service
cost
Quality Time Cost
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Making their client specific warrants attention
• Respect all sources of data:
• Understand their relationships—the “causal tree”:
• Recognised Cross-Industry; In-Industry and In-Company similarities and differences.
Blind-sided Intuition Opinion Discussion Survey Functional Measures KPIs External Best Practice
Qualitative Quantitative
Objective 1
KPI
KPI
KPI
KPI
Objective 2
• KPI and xxx measure• “Dual service” measures (
cost & time)• “Hard wired” and tennons• Push-pull
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Making their client specific warrants attention (cont.)
• Recognise Cross-Industry; In-Industry; and In-Company similarities and differences.
• Interface the solution to the current clients’ measures, systems, processes and culture:
– . . . and guide migration over time.
Ensure accountability for collecting and actioning is clear.Ensure accountability for collecting and actioning is clear.
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Proposed Supply Chain KPIs
KPI’s help to identify “where” the performance problem is within the supply chain, and steer towards areas to explore “why”.
KPI’s help to identify “where” the performance problem is within the supply chain, and steer towards areas to explore “why”.
Accuracy (as % of sales)
Customer satisfaction
% of satisfied customers
Total cycle time
Time (for customer) from placing order to
receiving goods
% of products delivered on
time
Total supply chain cost as %
of sales
Cost per product sold as
% of sales
Cost as % of sales
% of products delivered
according to customer order
(quantity/quality)
% of customers satisfied with
service
% of products ordered already
in stock
Defect rate of products as % of
production
% of goods delivered
according to order
(quantity/quality) by supplier
Time from order placement to reception of goods
Time from production order to delivery into finished product warehouse
Downtime as % of total
production time% of goods delivered on time by supplier
Cost as % of sales
Cost as % of sales
Cost as % of sales
Number of stock turns/years
Total Supply Chain Forecasting Purchasing Inbound Logistics Manufacturing Maintenance Inventory
Management Marketing & Sales Customer Service Outbound Logistics
Quality
Time
Cost
% of active suppliers that
account for 90% of total purchase
value
Need to identify M&S
KPIs
BEWARE of inter-
relationships
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Each stage of the supply chain has a variety of metrics to monitor operational effectiveness
These metrics help identify “why” there is a performance problem.These metrics help identify “why” there is a performance problem.
Forecasting Purchasing Inbound Logistics Manufacturing Maintenance
Quality
Time
Cost
• Actual vs. forecasted sales
• % of data which can be used without modification in the planning process
• % of all active suppliers that account for 90% of total purchase value
• % of correct orders placed• # of alternative sources of supply• # of suppliers involved in product
development/innovation• # of suppliers per purchasing
employee (purchasing professional)
• # of vendors products ordered• Purchasing head count as % of
total head count
• % of goods delivered according to order (quantify/quality) by supplier
• # of carrier alliances• # of overshipments• % of direct material purchases that
are not inspected at incoming quality assurance, going from stock to dock
• % of direct material purchases that are not inspected at incoming quality assurance, going from stock to production
• % of orders delivered without unplanned communication or special attention
• Defect rate of products as % of production
• Scrap rate as % of production• # of changes per production period• % of goods repackaged• Actual vs. production capacity
• Time from order placement to reception of goods • Time from production order to deliver into finished product warehouse
% of accounts payable handled before due date
• % of accounts payable handed in 1–30 days
• % of accounts payable handled in 31–60 days
• % of accounts payable handled in 61–90 days
• % of accounts payable handled in over 90 days
• % of suppliers connected via EDI• Average actual time to developed/n
egotiate a contract
• % of goods delivered on time by supplier
• Proportion of suppliers who deliver daily
• Proportion of suppliers who deliver frequently than monthly
• Proportion of suppliers who deliver monthly
• Proportion of suppliers who deliver twice weekly
• Response time to schedule changes• Response time to unforeseen
problems• Turnaround time on rejected items
• Average production leadtime• Current manufacturing leadtime• Minimum production leadtime
• Downtime as % of total production time
• Downtime due to parts shortage (or stock outs in general)
• Hours of unplanned downtime
• Cost as % of sales • Cost as % of sales
• Cost as % of total costs• Cost of orders purchased (range• Cost of vendor transactions (range)• Cost of expedite repair materials• Purchasing spend per supplier• Purchasing spend per purchasing
employee (purchasing professional)
• Cost as % of sales• Cost as % of total sales
• Cost as % of sales
• Cost per saleable unit• Cost per unit produced
• Cost as % of sales• Cost per unit produced
Source: H. Cook
• Nos of strategies, or “uptime” service-based contracts
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In addition to the KPIs each stage of the supply chain has a variety of metrics to monitor operational effectiveness (cont.)
Inventory Management Marketing and Sales Customer Service Outbound Logistics Total Supply Chain
Quality
Time
Cost
• % of products ordered already in stock• Defect rate of products as % of
products leaving warehouse• Accuracy of inventory records• Inventory vs. service level• Items in inventory as % of total unit
purchases• Obsolete vs. active inventory
• % of correct orders taken• # of additional sales from customer
referrals• # of order changes as % of orders filled• % of orders handled with commitment to
product/service delivery on first call
• % of customers satisfied with service• # of complaints as % of total orders• # of phone calls to customer service
development per order shipped• # of complaints due to On-time delivery;
Order Entry; Packaging; Product quality; Shipping Error
• # of complaints as % of total orders• # of customer contacts per order• # of enquiries (including complaints) that
were not answered to the customers satisfaction
• # of information requests as % of customer orders
• % of calls abandoned, answered by recording, delayed
• % of customer contact through customer service
• % of customer follow-up handled by Customer Service Representative; Department Manager; Field Representative; Responsible Manager
• % of invoices containing errors• % of orders delivered complete and
without error (order fill rate)• % of orders that are damaged on arrival
at customer site• % of respondents that can handle
complaints without handing off to other person/dept.
• Average % of disputed invoices
• % of products delivered according to customer order (quantity/quality)
• Degree of utilisation of facilities (%)• Equipment utilisation—load• Equipment utilisation—weight
• Time from order placement to start of delivery
• Customer satisfaction (rating)• % of satisfied customers• % of information on credit history limit av
ailable On-line• % of information on open-order history a
vailable On-line• % of information on outstanding balance
available On-line• % of information on pricing available On-l
ine• % of information on product history avail
able On-line• % of information on product ID code avail
able On-line• % of information on shipping points avail
able On-line• Ratio of operations labour as % of passiv
e labour
• Average # of orders rejected• Average product time in warehouse• No. of days consumption in stock (A-
goods)• No. of days consumption in stock (B-
goods)• No. of days consumption in stock (C-
goods)• No. of days safety stock (A-goods)• No. of days safety stock (B-goods)• No. of days safety stock (C-goods)• No. of products with duplication stock• Planned days of inventory on hand
• % of accounts receivable settled before due date
• % of accounts receivable settled in 1–30 days
• % of accounts receivable settled in 31–60 days
• % of accounts receivable settled in 91 days
• % of accounts receivable settled in61–90 days
• Delivery time• % of products delivered early• # of deliveries per manhour• % of orders delivered on time (as defined
by customer)• % of orders delivered with an average de
lay of 1 month• Average # of days delay after scheduled
ship date
• Total cycle time• Time (for customers) from placing order to
receiving goods• % of products delivered on time• Average customer quoted leadtime• Average leadtime from receipt of order to shipment• Average time taken to access information• Cash to cash cycle• Longest customer quoted leadtime• New product introduction time• Product changeover time• Shortest customer quoted time• Time from receipt of order to receipt of
shipment by customer• Time taken to rectify incorrect or damaged orders
• Average time taken to respond to requests
• Cost as % of sales• # of stock turns/year• Cost as % of cost of goods purchased• Carried worth of expired lots• A-goods as a percent of inventory• Average stock level• B-goods as a percent of inventory• C-goods as a percent of inventory• Inventory cost as % of total assets (gross
assets)• Maximum stock level• Minimum stock level
• Cost as % of sales • Cost as % of sales• Cost per delivery• # of route miles per delivery• # of warehousing facilities• # of warehousing of locations• % of transportation units owned by
company• Cost per order• Cost per route
• Total supply chain cost as % of sales• Cost per product sold as % of sales• % of profit from base purchase• % of profit from increased purchases• % of profit from premium pricing• % of revenue generated by largest
customer group (top 20%)• Cost per product sold as % of sales• Operating profit per customer as % of
operating costs per customer• Total cost per order• Total cost per unit produced
• Cost as % of sales
Source: H. Cook
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Given the multitude of metrics we suggest to analyse supply chain performance using a hierarchy of measures
. . . digging through the causal tree to improve business performance.. . . digging through the causal tree to improve business performance.
Key KPI
SupportingMetrics
Other OperationalMeasures
Type of Measure Example Highest Level
Use Who Uses It
• Forecasting accuracy (as % of sales)
• Integrated supply chain
• Generic benchmarking
• Consultant• Top management• Supply chain
stage manager
• % of suppliers connected via EDI
• Supply chain stage diagnostic
• Consultant• Supply chain
stage manager
• A-goods as a % of inventory
• Supply chain stage diagnostic
• Supply chain stage manager
Objective
• Find “where” the problem is within the supply chain
• Identify the “why” within the supply chain stage
• Give more in-depth information about supply chain stage
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For example, the quality of customer service performance can be clearly measured at three different levels
Quality
Key KPI’s Suggested Supporting Metrics
Other Operational Measures
• % of customers satisfied with service
• # of complaints as % of total orders
• # of phone calls to customer service department per order shipped
• # of complaints due to: order entry, packaging, shipping error, . . .)
• % of calls abandoned, answered by recording, delayed, . . .
• % of complaints handled by: customer service rep., department manager, . . .
• KPI’s will be measured for generic benchmarks, whilst operational metrics will be measured by a customer service manager.
• . . .
• # of complaints that were not answered to customer satisfaction
• Average number of orders rejected
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Key KPI’s Suggested Supporting Metrics
Other Operational Measures
Outbound logistics performance . . .
• % of products delivered according to customer order (quantity/quality)
• (These can often be driven by customer service metrics)
• Degree of utilisation of facilities (%)
• Equipment utilisation (load/weight)
• Delivery time• % of orders delivered on
time (as defined by customer)
• # of deliveries/man hour• % of orders delivered early• % of orders delivered with
an average delay of 1 month
• Average number of days of delay after scheduled ship date
• Cost as % of sales • # of route miles per delivery• # of warehousing
facilities/locations• % of transportation units
owned by company
• . . .
• Cost per delivery• Cost per order• Cost per route
Quality
Time
Cost
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Key KPI’s Suggested Supporting Metrics
Other Operational Measures
Quality
Time
Cost
For maintenance, commonly used supply chain performance metrics relate to time and cost
• The quality of maintenance is commonly measured by lag measures in terms of cost or as a production measure (downtime).
• We suggest the use of two lead measures that proactively monitor maintenance performance.
• . . .
• Number of service contract• Number of training days
for maintenance staff
• Downtime as % of total production time
• Cost as % of sales• Cost per unit produced
• Downtime due to parts shortage (or stock outs in general)
• Hours of unplanned downtime
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Just remember . . .
• A large number of metrics exist, so be selective.
• A step by step approach to measuring supply chain performance should be undertaken in order to avoid being overwhelmed by data.
• The following segmentation gives us such an approach:– 23 key KPI’s allow us to identify “where” the problems” exist within the supply chain.
– Key supporting metrics then allow us to answer “why” the problems exist.
– Operational metrics allow us to go analyse the supply chain stage in more detail.
• The “right” set of metrics does not exist for a given industry or even a specific company.
• The “right” set of metrics is dynamic like the business it measures and will change with the type of industry/problem and over time.
• . . .
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Next Steps for the Supply Chain CoE
• Agree on how you will go forward after this project.– Agree on objectives, scope and accountabilities.
– Eg. Discuss if each GMT needs its own supply chain metrics.
• Further populate the supply chain benchmarking framework.– See example for Purchasing.
• Championing (S. Beck/Disc. Heads).
• . . . and roll-out.
• Continuous improvement process.
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Appendix
• KPI Definitions.
• Causal Trees:– Quality
– Time
– Cost
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Purchasing Data: KPIs & Benchmarks
a: CAPS Research: Chemical Purchasing Benchmark 1997; H. Cook shop research.
Industry Sector Benchmarking Range/Best Practice
(Validate source)
Average Manufacturing
(Validate source)
Chemicals Best Practice
(Validate source)
Global Chemical Purchasinga
0.06%–3.0% 0.30%
Measure
QU
AL
ITY
TIM
EC
OS
T
Automotive (Global)a
Pharma. (Global)a
Eng./Constr. (Global)a
• % of correct orders placed• # of alternative sources of supply• # of suppliers involved in product
development/innovation• # of active suppliers per purchasing professional• # of vendors products ordered• % of all active suppliers that account for 90% of
total purchase value• % of purchases handled by purchasing
department• Purchasing head count as % of total head count• % purchases handled by purchasing function• % spend on long-term basis (>2yrs)• % firms using consortium buying• Training per purchasing professional
• % of accounts payable handled before due date
• % of accounts payable handed in 1–30 days• % of accounts payable handled in 31–60 days• % of accounts payable handled in 61–90 days• % of accounts payable handled in over 90 days• % of suppliers connected via EDI• Average actual time to developed/negotiate a
contract• % goods delivered on time by supplier• Time from order placement to receipt of goods
• Cost as % of sales• Cost as % of total costs• Cost of orders purchased (range• Cost of vendor transactions (range)• Cost of expedite repair materials• Purchasing spend per supplier• Purchasing spend per purchasing• Purchase Dept. expense (¢ per $ sales)
65%
29%4%1%1%
9 weeks
59%
$24.8m31/100 ¢
18 cos £12bn
2–26 weeks
50%
42%6%1%1%
61%
26.515/100 ¢
!0 cos $23bn
50–87
20%
1–10%
6–182 9–267
5–75%
0.3%–4.5%
165
7.9%(18% xxx)
82
1.4%82%50%
22
26
1%97%
272
0.4%
27%26%
42 hrs
30
21
5.5%
11% 79% 33% 1%
19%
2610/100 ¢
19 cos $3.5bn
459/100 ¢
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ServiceService Product DeliveryProduct Delivery
Wrong Info.Wrong Info.Higher Prices
Than Competitors
Higher Prices Than
Competitors
Higher Margin Than
Competitors
Higher Margin Than
Competitors
Badly Set Customer
Expectations
Badly Set Customer
Expectations
Wrong Order Information
Wrong Order Information
Unable to Meet Customer Demand
Unable to Meet Customer Demand
Produced Faulty GoodsProduced
Faulty GoodsProducts Damaged After Mfg
Products Damaged After Mfg
PricePrice Product QuantityProduct QuantityProduct QualityProduct Quality
Delivered Faulty Goods
Delivered Faulty Goods
Quality
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Did Not Have the Right Materials
Did Not Have the Right Materials
ForecastsIncorrect
ForecastsIncorrect
InformationFailure
InformationFailure Human
FailureHumanFailure Technical
FailureTechnical
Failure
Late ArrivalLate Arrival Late Departure
Late Departure
Late ArrivalLate Arrival Information Failure
Information FailureInfrastructure
FailureInfrastructure
Failure Product Failure
Product Failure
WrongInformation
WrongInformation
Info. Sent to WrongPerson
Info. Sent to WrongPerson
InformationSent Late
InformationSent LateProduct Not
in StockProduct Not
in StockFaultyProductFaulty
ProductHumanFailure
HumanFailureTechnical
FailureTechnical
FailureUn-
controllableFactors
Un-controllable
FactorsInformation
Failure
InformationFailure
InfrastructureFailure
InfrastructureFailure
HumanFailure
HumanFailure
Did Not ProduceAnymore
Did Not ProduceAnymore
Did Not ProduceEnough
Did Not ProduceEnough
InformationSystem Failure
InformationSystem Failure
Technical Failure
Technical FailureHuman
FailureHuman Failure
Could Not Produce
To Capacity
Could Not Produce
To Capacity
Total Capacity
Too Small
Total Capacity
Too Small
Other ProductionPriorities
Other ProductionPriorities
Materials Not
Delivered
Materials Not
Delivered
Wrong MaterialsDelivered
Wrong MaterialsDelivered
Materials Delivered
Late
Materials Delivered
Late
SuppliersForgot
SuppliersForgot We Did Not
OrderWe Did Not
OrderSuppliers
GotOrder Wrong
Suppliers Got
Order Wrong
We Got Order Wrong
We Got Order Wrong
SuppliersDelivered
Late
SuppliersDelivered
LateWe Ordered
LateWe Ordered
Late
Time
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Purchasing CostPurchasing Cost Customer Service CostCustomer
Service CostInventory CostInventory Cost Delivery CostDelivery CostProduction CostProduction Cost
Too Much Stock
Too Much Stock
Wrong Type of Products
Wrong Type of Products
Obsolete StockObsolete Stock
Infrastructure Stock
Infrastructure Stock
Human Resources
Costs
Human Resources
Costs
Used More Expensive Materials
Used More Expensive Materials
Materials Arrived LateMaterials
Arrived Late Human FailureHuman Failure Technical Failure
Technical Failure Human
Resource CostHuman
Resource Cost Maintenance Cost
Maintenance Cost ComplaintsComplaints
WastageWastage PlanningPlanning
Used More Raw MaterialsUsed More
Raw Materials
Higher Cost Than
Competitor
Higher Cost Than
Competitor Ordered LateOrdered Late Different Materials
Different Materials
PeoplePeople SystemsSystems
Same Suppliers
Worse Deal
Same Suppliers
Worse DealDifferent SuppliersDifferent Suppliers
SkillsSkills ProductProduct MOTMOT
Promotion Sales Volumes
Lower
Promotion Sales Volumes
Lower
Don’t Know How to
Negotiate
Don’t Know How to
NegotiateMany
SuppliersMany
Suppliers
Cost
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Definitions for the Supply Chain KPIs
• Forecasting:– Accuracy (as %of sales).
• Purchasing:– % active suppliers for 90% spend.
– Time from order placement to receipt.
– % of goods delivered on time.
– Cost as % sales.
• Inbound Logistics:– % of good delivered according to order (quantity/quality) by supplier.
– Time from order placement to reception of goods.
– % of goods delivered on time by supplier.
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Back Up Panels
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Drivers and KPIs are however linked throughout the supply chain
• They form a “causal tree” along the supply chain which varies between industries and over time
• They do not simply drive and explain just quality, time or cost, they may drive or explain all three
• We have simplified the tree in this presentation:
– We have left out the links and kept the model on a generic level
We have not developed a “perfect” modelWe have not developed a “perfect” model
Function/Process Stage
Quality
Time
Cost
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These operational metrics should be used with care
• Ideally they should support key KPI’s by explaining why performance is meeting/below expectations.
• They should also give an in-depth picture into how well each supply chain stage is performing.
• However, their use calls for judgement:– They vary across companies and industries (which explains the large quantity of metrics available).
– Many are not directly linked to key KPI’s but are useful secondary indicators of performance.
– They do not necessarily link to performance at just one stage in the supply chain (but accountability must be assigned to someone within one stage).
– For example: inaccurate order making could lead to more time being spent on puchasing, suppliers delivering the wrong goods and/or suppliers delivering the goods late.