Supply Chain Management Lecture 13 –

Measurement & Metrics

Alexa Kirkaldy

Lecture 13 - Learning ObjectivesOn completion you will be able to:

• Discuss some of the weaknesses of traditional measurement systems

• Explain how the balanced scorecard and supply chain measurement systems can help improve alignment, emphasise customer satisfaction and promote process integration.

• Be aware of the SCOR model.

Measurement Clichés “If you can’t measure it, you can’t manage it.”“What gets measured gets done.” Tom Peters“When performance is measured, performance improves. When

performance is measured and reported, the rate of improvement accelerates.” Thomas Monson

“Not everything that counts can be measured, and not everything that can be counted counts.” Albert Einstein

• Measurement creates understanding• Measurement drives behaviour• Measurement leads to results

Fawcett, Ellram and Ogden, “Supply Chain Management”, 2014, Chapter 13

Great Visionaries!But what is the message?

1. “Everything that can be invented has been invented” (Charles H. Duell, Commissioner, US Office of Patents, 1899).

2. “This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication” (Western Union internal memo, 1876).

3. “Heavier-than-air flying machines are impossible” (Lord Kelvin, President, Royal Society, 1895).

4. “Who the hell wants to hear actors talk?” (H.M. Warner, founder of Warner Brothers, 1927).

5. “I think there is a world market for maybe five computers” (Thomas Watson, Chairman of IBM, 1943).

6. “There is no reason anyone would want a computer in their home” (Ken Olson, founder of Digital Equipment Corp., 1977).

Change is CONSTANT!

•Traditionally most measures are functional

•Key end-to-end Supply Chain metrics must replace the traditional metrics

Metrics in the traditional supply chain reflect its fragmented nature

$$$

Cash to Cash Inventory Days of Supply Supply Chain Response Time Total Order Fulfilment Lead Time

$

With only financial metrics being cross-functional

Evolving characteristics of Customer Satisfaction metrics

Traditional Practice Emphasizes Best in Class Emphasizes

Internal service measures over customer satisfaction measuresExternal assessment that reveals what customers really think is important

Measures that are expressed as averages Absolute measures expressed in customer centric terms

Measure that treat all customers the same Measures that recognize unique needs of individual customers

Traditional Measurement

Fawcett, Ellram and Ogden, “Supply Chain Management”, 2014

Framework for supply chain measurement• Delivery performance

– Delivery compared to customer request date– Delivery compared to commit date

• Responsiveness and flexibility– Order fulfilment lead time – Supply chain response time

• Total Supply Chain Cost– Total acquisition cost / total cost of ownership– Customer order management costs

• Cash to cash cycle time– Inventory days of supply– Cash to cash cycle time

Time

The right…Place

Condition

Quantity

Cost

Product

Customer

Rushton, Croucher and Baker (2010)

Great delivery performance

Delivery Performance

Supply Chain Response Time

Re – plan response time

+

Source response time

+

Make response time

+

Deliver response time

Total Supply Chain Cost

Order management cost +Material acquisition cost+Inventory carrying cost +Supply chain finance, planning and execution cost.+ Market mediation costs

Cash to Cash Cycle

Cash-to-cash cycle time:

Average days to turn a dollar invested in raw material into a dollar collected from the customer= Total inventory days of supply + days receiveable – days payable

Inventory:

Inventory days-of-supply or ratio of inventory to cost of goods sold.

SC Inventory Days of SupplyTotal 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

Cash to Cash Cycle TimeThe 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 payable outstanding)

Inventory Dwell TimeThe ratio of days inventory sits idle to days inventory is being productively used or positioned

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 Fulfilment Cycle Time The average actual lead times consistently achieved, in calendar days, from customer order to customer delivery.

On Shelf In Stock Percentage The percentage of time that a product is available on the rack, shelf or wherever the customer expects to find and buy it.

Perfect Order FulfilmentA perfect order is one that is delivered complete, on time, in perfect condition and with accurate and complete documentation. Fulfilment is the percent of order that are perfect ( perfect orders / total orders)

Source / Make Cycle Time The cumulative time to build a shippable product from scratch, starting without inventory in stock or on order.

Supply Chain Response Time The theoretical number of days required to recognize a major shift in market demand and increase production by 20 %

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

Value Added Productivity Total company revenues generated less the value of externally sourced materials expressed as a ratio of total company headcount.

Other Supply Chain Performance Measures

Linking Measures Corporate

Mfg Director

PlantManager

DepartmentManager

ProcessDrivers

Returnon assets

Inventorydays

Output/Equipment $

Output/Square metre

Occupied

ManufactureCycle Time

Finished GoodsInventory Days

Days VendorLead Time

Machine Down Time

% Good OutputTotal Output

% UnplannedSchedule Changes

Defective Sub-assembly

Parts Availability

Wait on QC

NoMan

power

PowerFailure

Change-over

Times

Beischel and Smith (1991)

Difficulties of aligning measures in a single firm

Adapted from Ray Martin (1997)

Corporate Strategy

Corporate Plan

Integration of Functional Objectives

MarketingStrategy

FinancialStrategy

ManufacturingStrategy

HRMStrategy

InnovationStrategy

Operational &Departmental Strategies

MainlyFinancialMeasures

Mix ofFinancial& Non-FinancialMeasures

Mainly Non-FinancialMeasures

Performance measures satisfying functional strategies

Performancemeasuressatisfyingstrategicplan

Kaplan & Norton’s Balanced Scorecard

How do our customers see us? Customer perspective

How do we look to our shareholders?

Internal business perspective

Linking long term strategy to short term actions

Financial perspective

Can we continue to improve & create value?

What must we excel at?

Innovation and learning perspective

Linking SCM to the Balanced Scorecard

Harrison A. & van Hoek R., Logistics Management and Strategy, 2012.

Tesco Wheel

‘Our management tool called the Steering Wheel is divided into four quadrants – Customer, Operations,

People and Finance – which, in turn, are divided into several segments, each with a set of Key Performance Indicators (KPIs) which are based

on demanding but achievable targets’

Supplier

Plan

Customer Customer’sCustomer

Suppliers’Supplier

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver

Internal or External Internal or External

Your Company

Source

Supply Chain Operations Reference Model (SCOR)

SCOR Model

Return Return ReturnReturn Return Return Return Return

Building Block Approach

Processes Metrics

Best Practice Technology

Types of Benchmarking Internal

– comparing internal operations across departments of business units

Competitive– comparing the product or operations with a direct competitor

Functional (or industry)– comparing similar functions in the same broad industry

Generic– comparing business functions or processes regardless of industry

Customer– comparing performance against customer expectations

SCOR: Strategic, Tactical, Operational

Supply Chain Performance Metrics Framework, Gunasekaran, Production Economics (2004)

Things to do!Read the case study

Possible oral presentation questions• How is performance measured in this industry

or firm?• Who is the best supply chain manager in this

industry and what should be the benchmarks for performance?

Lecture 13, Key Points & TipsBased on Fawcett, Ellram and Ogden, “Supply Chain Management”, 2014.• A firm’s ability to monitor and evaluate its value-added processes & work effectively with

supply chain partners depends on its measurement capability• Traditional measurement has focused on asset management, cost, customer service,

productivity and quality.• Measurement can be used to create alignment and should try to link strategy to

measurement, align measures across functional areas and align measures vertically in the firm and through the supply chain.

• Customer focussed measures must find out what customers value and how they evaluate performance.

• Process costing using techniques such as Activity Based Costing and total cost of ownership are critical in making trade-offs visible.

• Benchmarking is a useful tool in establishing objective targets and identifying new methods for improvement, so called best practices.

• The balance scorecard approach can be used to overcome some of the weaknesses of traditional measurement systems by incorporating financial and non financial measures, communicating results more effectively and encouraging improvement.

• Firms and individuals find it hard to focus on more than 10 individual metrics and a range of 6 to 10 is normally recommended.

• The SCOR model can help in to benchmark and measure supply chain performance. Other models such as the EFQM model could also be used.

• The AMR and Gartner research provides a useful guide to the top 25 supply chains.