Executive SummaryAccounting for an incredible 60 to 90% of overall expenses, supply chain costs can be a significant lever for driving bottom-line performance. In fact, it’s estimated that a 5% reduction in supply chain spending can increase net income by over 40%. Yet, without a well-run supply chain, costs will rise and a business will fail to respond to customer demands, let alone market uncertainties. In contrast, enhancing supply chain performance can help find new sources of revenue more effectively, greatly improve financial results, and reinforce fiscal stability by reducing costs, increasing working capital, and strengthening customer loyalty.

But improving a company’s supply chain operations is a complex process, with many challenges. Globalization of markets, though it opens up opportunities in both production and distribution, also exponentially increases complexity – not to mention susceptibility to disruptions due to manmade or natural disasters or political unrest.

In the face of such uncertainty, companies wanting to succeed need both visibility across the supply chain and insight into performance. Metrics can both provide greater visibility and drive insight into opportunities and risks, though it can be difficult to choose the most effective metrics, not to mention selecting the best model for tracking multiple and interacting metrics. Metric frameworks help standardize definitions and facilitate benchmarking, yet real differentiation and process improvements come from how a company monitors, interprets, and uses metrics to drive tactical and strategic decision making. While many models to track metrics exist, the Supply Chain Operations Reference (SCOR®) model is one of the most widely recognized. SCOR provides a unique structure designed to align a critical web of business processes, metrics, best practices, and technology.

Establishing the right metrics framework as part of an overall performance management strategy means companies can break down enterprise-level goals – such as order fulfillment, forecast accuracy, and material costs – into department-level metrics such as on-time delivery, plant utilization, and order processing time. Providing robust visualizations, business analytics further translate metrics data into powerful business insight. This helps increase visibility, drive accountability, and improve performance. Companies such as DuPont have successfully used metrics and benchmarking to drive ongoing supply chain improvements. The SCOR model lets such companies focus on a standardized set of metrics, making it easier to identify, communicate, and replicate the most effective practices. The result for even the most complex organization: the ability to better manage an ever-changing supply chain in a highly volatile world.

Metrics vs. AnalyticsA performance management strategy requires clear metrics and powerful analytics.

Metrics quantify results and measure the success of an organization’s programs, operations, and investments. For example, project metrics inform the organization whether the project is on time, on budget, and meeting goals. Supply chain metrics define and quantify the performance of the supply chain.

Analytics use statistical methods, analysis, and modeling to develop new insights and understandings of business performance based on data, such as metrics and other inputs. Analytics focus on predicting what will happen next and then optimizing the related business decision.

Driving Sustained Improvements with Supply Chain Metrics and Analytics

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Increasing Supply Chain Complexity and RiskGlobalization Creates Complexity and OpportunityWhatever your business or your industry, it’s constantly affected by continued globalization. New markets emerge and regional manufacturing influence shifts. Not so long ago, for example, the BRIC nations were referred to as “emerging.” Today, all four are top-10 world economies: Brazil is ranked ninth, Russia sixth, and India fourth. China, currently the world’s second-largest economy, is predicted to pass the United States in the next few years and become number one.The Economist Intelligence Unit forecasts the real GDP in China and India will grow faster than any other country in the world.1 Market evolutions and increasing worldwide demand for products and services mean that supply routes will remain complex and ever-changing.

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Figure 1: 2010 Real GDP, Year on Year Percentage Change

Such shifts have led many companies to invest heavily in BRIC countries, as well as emerging secondary markets such as Vietnam and Turkey. However, notes SAP® supply chain expert Richard Howells, “Emerging markets no longer constitute an automatic ‘low-cost producer.’ Labor disputes and wage-related strikes are pushing up wages in many regions.”

Wage increases also have other effects. On the demand side, globalization continues to lift incomes in developing countries – making them extremely desirable not just as manufacturing hubs but also as new and hungry markets. A company planning to establish manufacturing or distribution, find a contract supplier, or open a regional sales office in an emerging market must be armed with effective strategies and tactics to monitor costs and mitigate supply risks.

Addressing Risks from Supply DisruptionsA recent report by the insurance company Swiss Re estimates that, in 2010 alone, economic losses across the globe resulting from natural and man-made disasters totaled $222 billion, more than triple the numbers of 2009. This included losses from earthquakes, forest fires, oil spills, volcanic eruptions, and extreme weather conditions.

1 The Economist Intelligence Unit, Global Forecasting Service, 2010.

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Add to the list flooding, tornados, and other effects of climate change, not to mention political unrest. Any one of these events can send major sources of supply and demand into turmoil. Consider the price and supply volatility of raw materials, fuel, and commodities in the wake of a major natural disaster, and how much any one element affects the others. Howells elaborates: “Natural disasters and extreme weather have always been a part of life. However, in today’s global economy, the impact is exaggerated by the interdependence of our global society. If one link in the supply chain is broken, it can have a huge ripple effect.”

In short, the more we’re connected, the more disruption in any area broadcasts its effects throughout the world economy. Take into account multiplying levels of complexity, and it’s clear that companies destined to survive and thrive are those that can react quickly and flexibly across the board. Whether facing economic, environmental, supply, or demand changes, businesses are looking for solutions that enable responsive planning, support collaboration, and mitigate risk across supply chain networks.

Using Metrics to Drive PerformanceTo respond rapidly to disruptions, supply chain managers need both flexibility and comprehensive visibility into supply chain performance. According to Rich Sherman, a member of the founding team for Supply Chain Council (SCC) and Director at the Council of Supply Chain Management Professionals (CSCMP), “Whether the economy is trending up and growth and expansions are the norm – or down and cutbacks are needed – organizations must be able to adapt the supply chain to support their objectives.”

Continues Sherman, “For organizations desiring this level of insight and flexibility, supply chain analytics are critical.” One valuable analytical model is the Supply Chain Operations Reference (SCOR) from SCC, an independent, nonprofit global corporation working to advance the state of the art in supply chain management systems and practices.

The SCOR ModelThe SCOR model provides a unique framework that links business processes, metrics, best practices, and technology into a unified structure designed to improve the effectiveness of supply chain management. This includes collaborating with partners to identify and implement supply chain improvements.

SCOR helps manage common problems through a standardized set of language, metrics, and business practices that accelerate change and improve performance. Applying SCOR streamlines communication while dramatically improving the overall effectiveness of daily management and targeted improvement initiatives; gains are measured using the organization’s SCORindex. “We’ve seen drastic improvements in companies that use SCOR; [they] are consistent top performers in their industries,” says Sherman.

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Figure 2 shows how best-in-class companies using SCOR outperform their median competitors with more than a 50% cost advantage in supply chain costs.2

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Figure 2: Superior Supply Chain Management is a Source of Competitive Advantage

Organizations that use SCOR:

▸ Achieve consistent annual bottom-line improvements of 1–3%

▸ Reap significant cost savings and economic returns on SCOR-related investments

▸ Grow in aggregate share value two to three times faster than the Dow Jones and S&P 500 indexes

Leveraging Supply Chain Performance ManagementTracking metrics using a model such as SCOR is an important piece of an overall supply chain performance management strategy. To drive supply chain value and effectiveness, a company must align trading partners, service providers, employees, processes, and systems with a common set of goals and objectives. According to Siddharth Taparia, Senior Director of Business Analytics Solution Marketing at SAP, “Supply chain performance management is especially useful as a guide to managing the inevitable tradeoffs that occur in running a business in ways that support corporate objectives while mitigating risk.”

Continues Taparia, “The SAP BusinessObjects™ Supply Chain Performance Management application is based on the SCOR model and helps measurably improve the effectiveness of supply chain operations. With it, companies can better deliver on mandates such as lowering costs and improving return on working capital.”

2 American Productivity and Quality Center, SCORmark benchmarking database, www.apqc.org/scc.

Spotlight on DuPontDuPont is a multinational products and services company. In keeping with a corporate culture that values building internal competencies, it is now recognized as a leader in supply chain performance, with powerful results.

But a decade ago, DuPont’s values and performance didn’t line up as well as its leaders would like. In 2001, the company recognized the need to embrace the supply chain as a strategic driver. Since then, it has focused on a range of factors affecting its supply chain, and embarked on a 10-year journey in which it recreated and transformed its supply chain practices and processes. Now, in 2011, DuPont uses both SAP software and the SCOR model to address supply chain challenges that are dynamic and broad at the highest levels, and tactical and transactional at the lowest. The changes have been deep and wide-ranging, with striking effects across the business.

One of the company’s foremost supply chain experts, Peter Murray, notes, “From the start, we realized we had a long way to go. We had poor data quality and our practices weren’t effective, let alone standardized. We lacked the knowledge and processes to manage our end-to-end supply chain. We needed a framework to pull all the pieces together.”

DuPont, explains Murray, understood the strategic value of the supply chain, but lacked a strong organizing framework to drive it. “So we began to look at the SCOR model,” Murray explains. “As we incorporated SCOR, we were able to identify processes that we needed to fix. We were also able to build out core business metrics that tied to financial and operational goals.”

The road to supply chain excellence wasn’t always smooth. The company started by “playing around with a lot of metrics – too many metrics,” admits Murray. The result? “Before we knew it, we had metric overload and nobody was looking at KPIs.”

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In addition to providing a more accurate measure of whether a company is meeting its supply chain goals, the application can warn of potential bottlenecks, identify new opportunities, and help evaluate tradeoffs. For example, it makes little sense to set an objective of cutting supply chain costs by 6% if these same costs would have to increase to meet the corporate objective of increasing market share. But simply shifting the focus to revenue growth without regard to cost, risk, or strategic impact would also be incomplete. For instance, raising the perfect order shipment goal from, say, 92% to 98% would be counterproductive if the resulting higher product and shipping costs would be prohibitive for customers.

In such complex scenarios, supply chain performance management makes it possible for a company to make better, data-supported decisions about such important tradeoffs – including using risk management to assess the potential financial and operational impacts of decisions on KPIs. In alignment with the SCOR model, the SAP BusinessObjects Supply Chain Performance Management application gives organizations the complete support to:

▸ Provide full visibility into supply chain processes from start to finish, via a hierarchy of more than 350 KPIs

▸ Show how each metric relates to and affects the others

▸ Use this information to respond proactively to both near-term potential disruptions and long-term supply chain trends

Strategic Goals Supply Chain Effectiveness

Order Management Cost

Outbound Transportation Cost

FuelCost

InvoicesOutstanding

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Perfect Order Fulfillment

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Level 1 Metrics

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Figure 3: Metrics Hierarchy Example

Taparia goes on to explain, “With the right metrics architecture, an organization can break down enterprise level goals – such as perfect-order fulfillment, forecast accuracy, and supply chain costs – into department-level metrics such as on-time delivery by suppliers, plant utilization, and order cycle time.” The metrics hierarchy also helps identify key drivers and root causes of performance, such as fuel costs, express freight, returns, and outstanding invoices.

The SAP BusinessObjects Supply Chain Performance Management application helps each company identify and monitor the metrics that really matter for its particular organization, as illustrated in Figure 3. The application’s prebuilt metrics architecture is based on the SCOR model and other industry standards frameworks, yet remains flexible enough to meet each organization’s individual requirements. In fact, SAP received the

Spotlight on DuPont, continued from page 4

The company also focused on benchmarking as a way to determine what portfolio of projects and initiatives were needed to either improve performance of the supply chain or make a step change in capability. Comparing typical results from other companies helped DuPont quantify and monetize the potential of supply chain improvements, providing the direction the company needed to pursue the right set of initiatives. The results of inventory and cash performance benchmarking during the 2009 financial downturn firmly established the value of the approach for DuPont.

SCOR helped DuPont use what worked and refine what didn’t, Murray notes, and the refinements continue even after remarkable improvement. “Our current focus is on standardizing the way we implement supply chain improvements across the company. We want to drive improved performance and more transparency, and standardizing on the SCOR model is a big part of this thrust.”DuPont learned a lot from its journey, and continues to improve. Lessons Murray considers essential to the company’s success:

▸ Any change made to the supply chain must ultimately drive a desired business outcome.

▸ Remember to constantly balance the inevitable tradeoffs among cost, capital, and service level.

▸ Supply chain improvements generally require changes in three areas: processes and effective practices; people and behaviors; and tools, high-quality data, and technology.

▸ Figure out how to scale a project, so you can start small and expand in an effective way.

▸ Competency development of people is critical. Emphasizes Murray, “You have to acquire the knowledge and apply it. That’s the surest way to success.”

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SCC’s 2011 North American Supply Chain Excellence Award for Technology Advancement to recognize excellence in methodology or product development that enables superior supply chain performance.

Accountability, too, is a key premise for strategy-aligned supply chain execution – one that SAP’s solution supports throughout its processes. “Once the metrics are defined, documented, and associated with specific individuals within your supply chain network, you are well on your way to fostering greater accountability,” concludes Taparia. “In the end, the right metrics drive the right behavior, and behavior drives enterprise performance.”

ConclusionIn any organization, the supply chain will continue to evolve and change, reacting to internal pressures as well as external events large and small, natural and man-made. To manage such complexity and volatility, businesses need improved visibility into the drivers of supply chain performance. They must not only identify and track the right metrics, but use analytics to model how different decisions impact risk and results.

A flexible, powerful solution that uses SCOR analysis, such as the award-winning SAP BusinessObjects Supply Chain Performance Management application, can give even the most complex organization the ability to better manage its supply chain – whether through economic upticks or downturns. Companies such as DuPont have successfully transformed the supply chain function into a strategic differentiator that contributes to corporate performance on a daily basis. Enhanced supply chain performance and risk management will ultimately drive financial results and organizational success by reducing costs, increasing working capital, improving service levels, and strengthening customer loyalty.

To learn more about how SAP solutions can help improve supply chain performance, go to www.sap.com/scpm or www.sap.com/i2d. To learn more about SCC, go to www.supply-chain.org.

About the ContributorsPeter Murray is the Supply Chain Innovation and Development Program Manager at DuPont, and a leader in the company’s long-term supply chain transformation. He serves on the APICS Board of Directors, is active with the SCC and the Institute of Business Forecasting, and is one of the team that developed the APICS Certified Supply Chain Professional body of knowledge. He is a graduate of the University of Vermont.

Richard Howells heads supply chain marketing at SAP, where he drives market direction and positioning for SAP’s SCM solutions. Previously, he served as VP of marketing at Marcam Solutions and helped implement ERP and SCM systems at companies such as Nestle, Gillette, Colgate Palmolive, Rohm & Haas, Wyeth, Royal Worcester Spode, and Dairy Crest. A regular contributor to www.forbes.com, he holds a B.S. in computer science from the University of Mid Glamorgan in the UK.

Rich Sherman is Director of Strategic Development for the Council of Supply Chain Management Professionals. He successfully launched supply chain advisory services for AMR Research (now Gartner), helped develop the SCOR model, and was a member of the founding team of the Supply Chain Council. He has held senior management positions with Microsoft, EXE, DEC, Unisys, and Numetrix, serving clients in retail, distribution, manufacturing, and logistics. He holds bachelor’s and master’s degrees from the University of Notre Dame.

Siddharth Taparia is Senior Director of Business Analytics Solution Marketing at SAP. He joined SAP as part of the 2006 acquisition of BusinessObjects, and is now responsible for SAP Supply Chain Performance Management, a business analytics solution based on the SCOR model. He holds a master’s degree in information and operations management from Texas A&M University and a bachelor’s degree in engineering from Rajiv Gandhi Technical University, India.

About Supply Chain CouncilSupply Chain Council (SCC) is a global not-for-profit consortium whose methodology, diagnostic, and benchmarking tools help organizations dramatically improve supply chain processes.

SCOR (Supply Chain Operations Reference) is the world’s most widely recognized framework for evaluating and comparing supply chain activities and performance. Continually upgraded, SCOR provides a unique framework for defining and linking performance metrics, processes, best practices, and people into a unified structure. SCOR is a registered trademark of Supply Chain Council in the United States and Europe. All rights reserved.