BUSINESS INTELLIGENCE

KPIs OF SCM IN

MANUFACTURING INDUSTRIES

SUBMITTED BY

LAVANYA DEEPIKA TIGGA 215109036

ARUNAN V P 215109037

SARAVANAN S 215109070

SUBMITTED ON

1

15TH APRIL 2010

INDEX

No TITLE Page No

1 INTRODUCTION 3

2 MANUFACTURING INDUSTRY 7

3 SUPPLY CHAIN MANAGEMENT 9

4 KPI FOR SCM 11

5 SSTP, TRICHY 15

6 IDENTIFIED KPIs 16

7 CONCLUSION 18

8 REFERENCES 19

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INTRODUCTION

KEY PERFORMANCE INDICATOR

Key Performance Indicators (KPIs) help organizations understand how well they are performing

in relation to their strategic goals and objectives.

In the broadest sense, a KPI provides the most important performance information that enables

organizations or their stakeholders to understand whether the organization is on track or not.

Why do we measure performance?

The reason why we measure performance in organizations is often reduced to simple homilies,

such as ‘you can’t manage anything unless you measure it’ or ‘what gets measured gets done’.

The tree main reasons for measuring performance are (see also Figure 1):

To lean and improve

To report externally and demonstrate compliance

To control and monitor people

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Of these three the first is the most important, the second is something organizations just have to

do and the third one can cause major problems.

Measuring to learn and improve performance

Measuring for learning and improvement is the most natural form of using KPIs and something

we do every day in our daily lives. The aim is to equip our employees with the information they

need to make better informed decisions that lead to improvements. In this context, KPIs are used

internally as the evidence to inform management decisions, to challenge strategic assumptions

and for continuous learning and improvement. 

Measuring to report externally and demonstrate compliance

Another reason for collecting KPIs is to inform external stakeholders and to comply with

external reporting regulations and information requests. When measuring for external reporting

and compliance purposes, any reports and associated indicators can either be produced on a

compulsory basis such as annual financial statements, accounts, or performance reports for

regulators; or can be on a voluntary basis such as environmental impact reports, for example.  

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Measuring to control and monitor people

KPIs can also be used in a top-down command-and-control fashion to guide and control people’s

behaviors and actions. Here, measures are used to set goals or rules, to objectively access the

achievement of these goals, and to provide feedback on any unwanted variance between

achievements and goals. Here, the aim of measurement is to eliminate variance and improve

conformity. In this context, measures are often tightly linked to reward and recognition

structures. Research has shown that this approach is dangerous and often leads to a culture in

which people focus on delivering the measures but not the performance (i.e. hitting the target but

missing the point).

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The problems with KPIs

In practice, the term KPI is overused and often describes any form of measurement data and

performance metrics used to measure business performance.  Instead of clearly identifying the

information needs and then carefully designing the most appropriate indicators to assess

performance, we often observe what we have termed the ‘ICE’ approach:

Identify everything that is easy to measure and count

Collect and report the data on everything that is easy to measure and count

End up scratching your head thinking “What the heck are we going to do with all this

performance data stuff?

Using KPIs correctly

Best practice organizations

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a. Clearly understand what indicators are required for learning and improvement and focus

on those,

b. They separate out the external reporting indicators if they are not relevant internally to

avoid confusion and data overload, and

c. They try to avoid using indicators for controlling people.

MANUFACTURING INDUSTRY - PROFILE

Manufacturing is the use of machines, tools and labor to make things for use or sale. The term

may refer to a range of human activity, from handicraft to high tech, but is most commonly

applied to industrial production, in which raw materials are transformed into finished goods on a

large scale. Such finished goods may be used for manufacturing other, more complex products,

such as household appliances or automobiles, or sold to wholesalers, who in turn sell them to

retailers, who then sell them to end users - the "consumers".

Manufacturing takes turns under all types of economic systems. In a free market economy,

manufacturing is usually directed toward the mass production of products for sale to consumers

at a profit. In a collectivist economy, manufacturing is more frequently directed by the state to

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supply a centrally planned economy. In free market economies, manufacturing occurs under

some degree of government regulation.

Modern manufacturing includes all intermediate processes required for the production and

integration of a product's components. Some industries, such as semiconductor and steel

manufacturers use the term fabrication instead.

The manufacturing industry in India, has all the qualities which enhance economic development,

increase the productivity of the manufacturing industry and face competition from the global

markets. The Manufacturing industry in India is believed to have the potential of improving the

economic condition of India.

Indian manufacturing industry: Research findings

India has a working population of 75%. Out of this, only 600 million have acquired education till

middle school. Due to this reason, the manufacturing industry in India, which is labor intensive,

can provide the requisite number of employment units in the country. Studies have indicated that

the productivity of the manufacturing industry in India is approximately 1/5th of the productivity

in the manufacturing industry of United States of America. It is about ½ as compared to the

productivity levels in South Korea as well as Taiwan. Labor productivity has escalated only to a

small extent in case of India in comparison to United States of America, on the contrary, labor

productivity has increased manifold in countries like Taiwan and Korea.

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Manufacturing industry in India and exports:

Exports of manufactured goods in India accounted for 75% in comparison to exports of

manufactured goods all over the world. Owing to the performance manifested by the export

sector in India, the scenario indicates that there is less competition in the manufacturing segment.

Absence of competition is also established by the fact that in spite of reducing the tariff in the

early and mid 90s, India continued to be one of the protected economies of the world.

Contribution of India's export towards international market grew from 05% to 0.7% during 1990

to 2000. During the same period, Malaysia, China, Thailand and South Korea, registered almost

double increase in exports.

SUPPLY CHAIN MANAGEMENT

Supply chain management (SCM) is a process used by companies to ensure that their supply

chain is efficient and cost-effective. A supply chain is the collection of steps that a company

takes to transform raw components into the final product.

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Typically, supply chain management is comprised of five stages:

Plan

Develop

Make

Deliver

Return.

1. The first stage in supply chain management is known as PLAN. A plan or strategy must

be developed to address how a given good or service will meet the needs of the

customers. A significant portion of the strategy should focus on planning a profitable

supply chain.

2. DEVELOP is the next stage in supply chain management. It involves building a strong

relationship with suppliers of the raw materials needed in making the product the

company delivers. This phase involves not only identifying reliable suppliers but also

planning methods for shipping, delivery, and payment.

3. At the third stage, MAKE, the product is manufactured, tested, packaged, and scheduled

for delivery.

4. Then, at the logistics phase, customer orders are received and delivery of the goods is

planned. This fourth stage of supply chain management stage is aptly named DELIVER.

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5. The final stage of supply chain management is called RETURN. As the name suggests,

during this stage, customers may return defective products. The company will also

address customer questions in this stage.

Another model for understanding supply chain management groups all management activities

into three categories:

Strategic

Tactical

Operational.

Strategic activities include building relationships with suppliers and customers, and integrating

information technology (IT) within the supply chain. Studying competitors and making decisions

regarding production and delivery would fall under the tactical category. The operational

category includes the daily management of the supply chain, including the making of production

schedules.

Companies use forecast-distribution models in order to have the appropriate inventory, or safety

stock, necessary to meet fluctuations in customer demand. Forecast-distribution helps companies

maintain more efficient, and therefore more effective, supply chain management.

This greater variation in demand that can be seen in the supply chain as one moves away from

the end customer is known as the whiplash or bullwhip effect. A possible solution to this effect is

Kanban, a demand-driven supply chain. The participants in the supply chain would react to

actual customer orders, not forecasts of them.

KPIs FOR SCM

Key Performance Indicators define a set of values used to measure against. These raw sets of

values fed to systems to summarize information against are called indicators. Indicators

identifiable as possible candidates for KPIs can be summarized into the following sub-categories:

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Quantitative indicators which can be presented as a number.

Practical indicators that interface with existing company processes.

Directional indicators specifying whether an organization is getting better or not.

Actionable indicators are sufficiently in an organization's control to effect change.

Financial indicators used in performance measurement and when looking at an operating

index

Some important KPIs for Supply Chain Management in a manufacturing industry

1. Delivered In-Full, On-Time

Measures the percentage of orders delivered to the customer, which are both complete and on

time.

2. Software used to support supply chain

Measures the number of software products used within the supply chain management process, in

order to support it. Supply chain management software (SCMS) is an example of software tools

and modules used for supply chain transactions, managing supplier relationships or other

business processes associated with this.

3. Freight cost per unit shipped

Measures the average freight cost incurred for every unit shipped during the reporting period.

4. Average inventory value

Measures the average value of the inventory during a month, calculated by dividing the total sum

of the inventory during a period with the number of months. Measures the average value of the

inventory during a month, calculated by dividing the total sum of the inventory during a period

with the number of months.

5. Upside supply chain flexibility

Measures the time it takes a supply chain to respond to an unplanned percentage of increase in

demand without service or cost penalty.

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6. Cycle Time

Cycle time is the total time from the beginning to the end of your process, as defined by you and

your customer. Cycle time includes process time, during which a unit is acted upon to bring it

closer to an output, and delay time, during which a unit of work is spent waiting to take the next

action.

Cycle Time Ratio = StandardCycleTime / RealCycleTime

7. Utilization

Extent or level to which the productive capacity of a plant is being used in generation of goods

and services. Expressed usually as a percentage, it is computed by dividing the total capacity

with the portion being utilized.

8. Rejection rate

In manufacturing, the rejection rate is the percentage of processed parts that are rejected, for a

fixed period of time or lot of pieces.

RR = (Rejectedpieces/ProcessedPieces) x100

9. Fill Rate

Calculates the service level between 2 parties. It is usually a measure of shipping performance

expressed as a percentage of the total order.

Line Count Fill Rate:

The amount of order lines shipped on the initial shipment versus the amount of  lines ordered.

This measure may or may not take into consideration the requested delivery date

SKU Fill Rate:

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The number of SKU's (Stock Keeping Units) ordered and shipped is taken into consideration.

Above, we consider each Order Line to have an equal

Case Fill Rate:

The amount of cases shipped on the initial shipment versus the amount of cases ordered.

10. DPMO - Defects Per Million Opportunities

DPMO is a Six Sigma calculation used to indicate the amount of defects in a process per one

million opportunities.

DPMO = (Total Number of Defects / Total Number of Opportunities for a Defect)*1,000,000

Some defects can pass through a quality inspection and have little impact on the end product.

Other defects can result in re-work or scrap.

DPMO is sometimes used instead of Defect per Unit to allow for comparison between processes

with different levels of complexity.

Six Sigma uses statistical analysis to measure a company’s performance by identifying defects in

a manufacturing process. The goal of Six Sigma is to reduce process output variation to + or -

three standard deviations. This results in no more than 3.4 defects per million opportunities.

11. Backorder

It is an unfilled customer order. A backorder is demand (immediate or past due) against an item

whose current stock level is insufficient to satisfy demand.

Some companies count items that are not confirmed (not allocated) and past the Requested

Delivery Date (or Requested Ship Date). Other companies may also count those items with stock

confirmed, but past due.

Backorders may be expressed in "pieces", "SKU's" or in "value". Backorder calculations are

often tracked at a variety of levels. Example: Customer, Division, Total Company

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Aged Backorder

Reports on backorders in past-due time buckets based on the Requested Delivery Date/Requested

Ship Date.

12. Reverse Logistics

It is "the process of planning, implementing, and controlling the efficient, cost effective flow of

raw materials, in-process inventory, finished goods and related information from the point of

consumption to the point of origin for the purpose of recapturing value or proper disposal. More

precisely, reverse logistics is the process of moving goods from their typical final destination for

the purpose of capturing value, or proper disposal.

Remanufacturing and refurbishing activities also may be included in the definition of reverse

logistics. The reverse logistics process includes the management and the sale of surplus as well

as returned equipment and machines from the hardware leasing business.

Normally, logistics deal with events that bring the product towards the customer. In the case of

reverse, the resource goes at least one step back in the supply chain. For instance, goods move

from the customer to the distributor or to the manufacturer

13. Inventory turnover

A ratio showing how many times a company's inventory is sold and replaced over a period.

Inventory turnover = Cost of goods sold/average inventory

Average inventory = (Beginning inventory + ending inventory)/2

SSTP, TRICHY

INFERENCES FROM THE VISIT TO SSTP

SSTP is one of the major suppliers for BHEL. Bharat Heavy Electricals Limited (BHEL),

established in 1953, is one of leading power generation equipment manufacturers in the world.

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BHEL has 14 manufacturing units, 13 Regional Operation Divisions and more than hundred

"service-at-sites" facilities spread all over India. BHEL offers comprehensive service to its

customers in Conventional and Non-Conventional Energy, Industry, Transportation,

Telecommunication and Oil sectors. BHEL has also bagged export orders from 40 countries

around the world.

BHEL – Trichy: The High Pressure Boiler Plant of the Bharat Heavy Electricals Limited was

setup in 1963 for the manufacture of High Pressure Boilers. The plant achieved its full annual

capacity to design manufacture and supply high pressure boiler equipment up to 4000 MW in

1984 with boiler unit ratings up to 500 MW.

BHEL has over the years seen formidable growth in capacity, capability, turnover and

profitability. Product diversification has resulted in the development of new products enabling

BHEL to absorb modern technologies. Such innovations result in continuous updating of

manufacturing facilities to serve the customers in a more comprehensive way and for improving

quality and productivity.

Along with Seamless Steel Tube Plant (SSTP) (adjacent to the HPBP) are a Boiler Auxiliaries

Plant (BAP) at Ranipet (in the state of Tamil Nadu), a Piping Centre (PC) at Chennai in Tamil

Nadu and an Industrial Valve Plant (IVP) at Goindwal (in the Northern state of Punjab).

HPBP and SSTP are spread over 2908 acres of land at Trichy and BAP over 1256 acres at

Ranipet. HPBP and SSTP have a covered shop area of 2,50,000 square meters and BAP Ranipet

has 47,000 square meters of covered shop area.

Competitors

MSL

Kalyani Steels

ISMT

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SSTP – IDENTIFIED KPIs

BHEL is the major customer for SSTP (~90%), rest is supplied to small players and some are

exported.

Cycle time - Almost 1 month (30 to 45 days). If the necessity arises then they do it in 15

days. The cycle time also depends on the order made by BHEL. Currently SSTP has

orders for the next few years in advance. Hence this has made the future planning easier.

Software used to support supply chain – SSTP has entered automation in some areas.

They have a separate department for modernization, which is taking care of the

technological advancements. SAP is used by the company for certain processes. Further

automation plans are in progress. Thus this helps in faster processing and transactions.

Vendor Fixing - A team of experts are sent to the suppliers companies to do a thorough

inspection and they come and submit a report whether it’s good to sign a contract with

them. They give major importance to quality of product and delivery time. They give a

trial order to these vendors and note their performance on these criteria’s and rate them.

They see various criteria’s like

o Quality of product

o Manufacturing capacity and capability

o Financially sound

o Delivery time

Delivery time - The customer and the supplier fix the delivery time based on the

customer requirements. Sometimes the tube is not available so at that time the supplier

fixes the delivery time.

DPMO – SSTP has a edge over its competitors through quality. Much importance is

given for quality. Defects per million are reduced considerably over a period of time.

They have achieved 2-3 sigma level. Various quality improvement programs are

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conducted regularly to ensure quality. Employees are trained effectively to ensure the

same.

These are the few KPIs identified for SSTP after understanding the various processes of the

company. The company is planning for an expansion in the next 3 years, which will

approximately double its production capacity. Hot mill modernization is also a part of its future

plans.

CONCLUSION

From the analysis of Supply Chain Management in manufacturing industries we found these

indicators play a crucial role in measuring the performance of Supply Chain Management

Cycle time Software used to support supply chain Vendor Fixing Delivery time

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DPMO

Thus we suggest these indicators to be used to measure the performance as far as the Supply

Chain Management of Manufacturing Industry is concerned.

REFERENCES

http://www.ap-institute.com/Key%20Performance%20Indicators.html

http://www.economywatch.com/world-industries/manufacturing/india.html

http://en.wikipedia.org/

http://www.smartkpis.com/

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http://www.wisegeek.com/what-is-supply-chain-management.htm

http://www.iimm.org

http://www.supplychainmetric.com

http://www.bheltry-spares.com

Mr. Jayaprakash , AGM, Production (SSTP – Trichy)

Mr. Martin Tigga, SDGM, Management Services (SSTP - Trichy)

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