SCM METRICS-Presentation 1

BYK.SASHI RAO

MANAGEMENT CONSULTANT

Presentation 1-Coverage

Brief Introduction to SC/SCM Performance Management and its

Importance for SCM Performance Measurement Models - SCOR - Balanced Score Card

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What is Supply Chain?(1)

Supply Chain is a network of organizational

departments/functions involved thro’ upstream and

downstream linkages, in the different processes and

activities that produce value in the form of products

and services in the hands of the ultimate customer.

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What is Supply Chain?(2)

Supply Chain is a network of facilities and distribution

options that performs the function of procurement of

materials, transformation of these materials into

intermediate and finished products and the distribution of

these finished products to customers. Supply chains exist

in both service and manufacturing organizations, although

the complexity of the chain may vary greatly from industry

to industry and firm to firm.

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What is Supply Chain Management?(1)

Supply Chain Management (SCM) is the network of organizations and systems that are involved through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer

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What is Supply Chain Management ?(2)

• SCM is the process of planning, implementing

and controlling the operations of the supply chain

with a purpose to satisfy customers requirements

as efficiently as possible. SCM spans all

movement and storage of raw materials, work-in-

progress and finished goods from point-of-origin to

point-of-consumption.

( Keith Oliver, Booz Allen Hamilton,1982)

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• SCM means transforming a company’s supply chain into an optimally efficient customer satisfying process, where the effectiveness of the whole supply chain is more important than effectiveness of each individual department.(IMANTS BUBA, Belgium)

• A continuously evolving management philosophy that seeks to unify the business functions within the enterprise and allied business partners along with the entire supply chain into a highly competitive and total supply system focused on synchronizing the flow of value added products, services and expectations.(B.K. Kalyanramankumar)

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Performance Management-Strategic objectives

Profits-absolute and growth Sales- absolute and growth Market share-absolute and growth Supply chain performance Customer satisfaction Product quality and service Product development- time to market

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Performance Management

Competitive environment calls for speedy, cost efficient and reliable supply chain

Supply Chains have a huge leverage on creation of customer value

Today’s competition is ‘supply chain versus supply chain’

What gets measured, gets improved

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Performance Management

• All businesses need performance management

• Supply chains constitutes costs to organizations

• Measurement, control, review and corrective methods needed

• Cost-effectiveness and performance effectiveness are vital

• Strength and performance only as good as weakest link

• Performance measures needed specific to firm( to enable

improvements) and to industry/competitors ( to enable

benchmarking)

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Performance Measurement

MEASUREMENT is the key to performance management since:

If you cannot measure something, you cannot control it

If you cannot control something, you cannot manage it

If you cannot manage something, you cannot improve it

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Performance Management

Traditionally, performance management has been developed as a basis for monitoring and controlling an organization

But these have been primarily based on financial ratios like ROI, EPS and RI

While these are value based , they are lagging indicators, and do not provide help for planning future investments nor provide clues for performance improvement

They solely concentrate on minimizing costs and increasing labor efficiency but neglecting operational performance measures like quality, on time and full delivery amongst others

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Performance Issues

• Supply chain constitutes costs to organizations

• Cost-effectiveness and performance effectiveness

• Strength and performance only as good as weakest

link

• Performance measures needed specific to firm( to

enable improvements) and to industry/competitors ( to

enable benchmarking)K.Sashi Rao/2011

Performance vis-à-vis Competition

SCM competitiveness is derived from success

levels/criteria in:

Product/Quality Competitiveness

Price/Value Competitiveness

Time/Delivery/Responsiveness Competitiveness

Key is to see what customers expect, how your

competition is doing and what do we need to do to bridge

and exceed that gap

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Performance Measures-overall (SCOR basis)

Cost –internal facing

Assets Utilization- internal facing

Reliability – customer facing

Flexibility – customer facing

SCOR=Supply Chain Operations Reference basis (Supply

Chain Council)

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Performance Measures-Financial

Raw material and other acquisition costs• Facilities investment costs• Direct and indirect manufacturing costs• Direct and indirect distribution costs• Inventory holding costs• Transport costs- inbound and outbound• Activity based costs like material handling, assembling, outsourcing etc• Costs due to customer returns/ rejects/ replacements• Ratio of net sales to assets employed

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Performance Measures-Non-Financial Measures

•Customer satisfaction levels, periodic customer surveys• Conformances to agreed performance (quality specs, quantity,schedule etc) • Inventory level (days of sale)• Cash to cash cycle time (days of receivable and days of inventory less days of outstanding payables)• Lead times- production, procurement.• Cycle times- production, procurement, customer order fulfillment.

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Performance Measures-Logistics

Freight costs per unit weight/unit volume Warehousing costs per unit of throughput Logistical packaging costs per unit

product/volume/weight Labor cost per product/weight /volume Logistics assets utilization Logistics productivity performance Logistics cycle time performance Reverse logistics related costs/returns/damaged

stocks

All such costs to be finally measured as percent of sales and per unit volume and per unit weight

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Performance Measures -Inventory

Inventory turnover ratio (TO)(%) =Total investment in inventory/Annual sales x100

Inventory turns (TN) (number)=Annual sales/Total investment in inventory

Total inventory days (TID) ( number)=Total investment in inventory/Annual Sales x 365

Days of sales outstanding (DSO) ( number)=Accounts receivable/Annual sales x 365

Days of payable outstanding (DPO) (number)= Accounts payable/Value of raw materials consumed x 365

Cash to cash cycle (CCD) (days)= TID+DSO-DPO RM inventory (days)= Raw material inventory/Value of raw

materials consumed x 365 WIP inventory (days)=WIP inventory/Value of production x 365 FG inventory( days)= FG inventory/Annual sales x 365

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SCM Performance Benefits-to Customers

• Quicker response to demands• Better products/services• Competitive pricing of products/services• Faster supplies reducing inventories

• ALL LEADING TO CUSTOMER DELIGHT

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SCM Performance Benefits- to Suppliers • More business growth

• Reduced operational costs• Faster communication for timely decisions• Improved business –partner relationships• Organizational effectiveness and efficiency

•ALL LEADING TO BOTTOM LINE GROWTH

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Measurement Approaches

Supply Chain Council’s Supply Chain

Operations Reference (SCOR) Process

Reference Model – examining cost, assets,

reliability and flexibility metrics

Balance Scorecard- assessment based on

financial, customer, internal business &

learning/growth perspectives

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Process Reference Model This contains: Standard descriptions of management processes A framework of relationships among the standard

processes Standard metrics to measure process performance Management practices that produce best-in- class

performance Standard alignment to features and functionality Once captured as a standard process reference

model can be: Implemented purposefully to achieve competitive

advantage Described unambiguously and communicated Measured, managed and controlled Tuned and re-tuned to a specific purpose

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SCM Process Reference Model Draws from best in business process

reengineering, benchmarking and best practices analysis as applied to SCM

Captures the “as –is” state of SCM processes and derives the desired “to-be” future state

Quantify the operational performance of similar companies and establish internal targets based on “best in class results”

Characterize the management practices and software solutions that result in “best in class “ performance”

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SCOR Model- 5 Core Management Processes

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SCOR Model- 5 Core Management Processes

Plan- processes that balance aggregate demand and supply to develop a course of action which best meets sourcing, production and delivery requirements

Source – processes that procure goods and services to meet planned or actual demand

Make – processes that transform product to a finished state to meet planned and actual demand

Deliver – processes that provide finished goods and services to meet actual and planned demand, typically including order management, transportation management and distribution management

Return – processes associated with returning or receiving returned products for any reasons, which extends to post delivery customer support

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SCOR MODEL-Methodology(1)

Level 1: Analyse Basis of Competition Level 2: Configure Supply-Chain Level 3: Align Performance Levels,

Practices and Systems Level 4: Implement Supply-Chain

Processes and Systems

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SCOR MODEL-Methodology(2)

Phase 1- develop a SCOR card listing competitors and collection of competitive performance measures data

Phase 2- detailed analysis of material flows to identify improvement scope to close competitive gap

Phase 3-mapping material flows along with work and information flows to understand processes and activities

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SCOR Model Measures-internal facing(1)

Cost Total logistics cost Value added productivity Warranty cost Assets Cash to cash cycle time Inventory days of supply Asset turns

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SCOR Model Measures-internal facing(2)

Total logistics cost- contribution of logistics cost to total revenue as % age

Value added productivity- is calculated by the division of the difference between revenue and material cost by total employment

Warranty cost- as a % age of total revenue Cash-to-cash cycle time- time taken from cash

spent on materials to cash generated as revenue

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SCOR Model Measures-internal facing(3)

Inventory days - how fast inventory is produced and then sold to customers. Inventory turns is the ratio of total annual sales to average inventory

Asset Turns - division of revenue by total assets

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SCOR Model Measures-external facing(1)

Reliability Delivery performance Order fulfillment performance-fill rate,

fulfillment lead time Perfect order fulfillment Flexibility Supply chain responsiveness Production flexibility

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SCOR Model Measures-external facing(2) Delivery performance- defined as the %age of

ship-from-stock orders shipped within 24hrs. On time delivery is defined as the proportion of orders delivered on or before the date requested by customer

Order fulfillment- Lead times measure the meantime from the date of order is placed to the date the customer receives the shipment

Perfect order fulfillment-is reached with the right product delivered to the right place at the right time, for customer satisfaction

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SCOR Model Measures-external facing(3)

Supply chain responsiveness- as the ability of the complete supply chain to react according to the changes in the marketplace

Production flexibility- number of days needed to absorb an unplanned lasting 20% growth in demand

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Typical SCOR Model Results(1)(Source: www.supply-chain.org)

SCOR Measures

Unit ofMeasurement

MedianClass

Best in Class

Delivery performance

Percentage 81% 96%

Upside performance flexibility

Number of days

42.0 8.3

Cash to cash cycle

Number of days

66.6 24.7K.Sashi Rao/2011

Typical SCOR Model Results(2)(Source: www.supply-chain.org)

Supply Chain Cost/Industry

Unit of measurement

MedianClass

Best inClass

Consumer packaged goods

SCM cost % to Revenue

11.2 5.3

Chemical and Pharmaceuticals

SCM cost % to Revenue

9.8 4.0

Telecom Equipment

SCM cost % to Revenue

8.5 3.3

Defense and industrial

SCM cost % to Revenue

10.2 4.5

Computers andElectronics

SCM cost % to Revenue

9.1 4.0

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SCOR Model-Benefits

It aligns improvement efforts with the supply chain , and not the organization

It provides a comprehensive analysis of the supply chain focusing on the customer as the end –point

It enables selection of SCM improvement projects which will have maximum impact on the firm’s strategic objectives

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SCOR Model-limitations

Does not cover : Sales and marketing development R& D Product development Elements of post-delivery customer support

Does not address: Training Quality Information technology Administration

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Balanced Score Card

It is a concept for measuring whether the company is meeting its objectives in terms of its vision and strategy

This is done using 4 perspectives-financial, customer, internal business processes and learning and growth

Suggested performance indicators within each perspective follow

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Balance Score Card-Performance Indicators Financial- ROI, cash flow, financial result, return on

capital employed and return on equity Customer- delivery performance by date and quantity,

customer satisfaction and customer retention Internal processes- number of activities, opportunity

success rate, accident ratios and defect rates Learning and growth- investment rate, illness rate,

internal promotions %, employee turnover and gender/racial ratios

Since these above measures can be many and will vary from to firm, the key is to strike a ‘balance’ amongst all of them to truly reflect and measure what are the particular firm’s Key Success Factors or Key Performance Indicators

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What then is a BSC?

A performance measurement system A strategic management system A change management tool A communication tool

It is ALL or ANY of these and depends on how an individual firm wants to use it as a single comprehensive system/tool or along with other existing systems/tools

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Why implement BSC?

To increase focus on strategy and results To improve organizational performance by

measuring performance that matters To align organizational strategy with day

to day work of its employees To focus on drivers of future performance To communicate the vision and strategy to

all its key stakeholders To prioritize projects/initiatives with

maximum impact

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BSC as a measurement systemBSC as a measurement system

FinancialTo succeed financiallyhow should we appear

to our shareholders ?

Customer Relations

To achieve our vision how should we appear

to our customers?

Learning, Innovation and

GrowthTo achieve our vision

how will we sustain our ability to change and improve ?

Internal Service Process

To satisfy our shareholdersand our customers that

what business processes we must excel

VISION AND STRATEGY

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BSC as a strategic BSC as a strategic management systemmanagement system

Translates strategy into: Objectives Measures Targets Initiatives Each of the 4 perspectives will need

these above attributes

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BSC triangle

Desired state

Differentiating activities

What must be done

well to implement

strategies

How strategic

success is

measured

Mission

Vision

Strategy/Goals

ObjectivesIn each perspective

MeasuresIn each perspective

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Financial PerspectiveFinancial Perspective

What financial steps are necessary to ensure the execution of our strategy/goals?

Are the program’s/ department’s goals, implementation, and execution contributing to the bottom line?

Are we meeting operational and financial targets?

Dimensions of Quality: Efficiency

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Customer Relations Customer Relations PerspectivePerspective

Who are our target customers? How do our customers see us? How do customers rate our

performance? Dimension of Quality:

Accessibility Acceptability Continuity

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Internal Service Process Internal Service Process PerspectivePerspective What critical processes must we excel at to

satisfy our customers/stakeholders? What must be done internally to meet

customer expectations? Dimension of Quality:

Effectiveness Appropriateness Consistency Reliability

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Learning, Innovation and Learning, Innovation and Growth PerspectiveGrowth Perspective

How can we continue to improve? What capabilities and tools do our

employees need to execute our strategy/goals?

Dimension of Quality: Competence Participation Involvement and commitment

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When does BSC succeed? Obtained top management sponsorship and commitment Involved a large base of leaders, managers and

employees Worked thro’ the established vision and strategy Agreed on the terminology and metrics to be monitored Designed BSC model to suit the firm’s needs Have a dedicated and determined project/program

champion View the BSC as a long term journey and not a short term

project Planned for and managed change Have an interactive two-way communication process Applied a disciplined implementation framework Get outside help especially in the initial design stages to

give it an outside/objective perspective

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When does BSC fail? Ill defined strategy Lack of integration of all the 4 perspectives Conceptual confusion and lack of clarity on metrics chosen

and their performance mechanisms Not involving all stakeholders Top-down management style which excludes employees being

an essential part of the implementation Centralized measures which will not be accepted by people

down the line Data collection/analysis of performance a difficult and painful

process Not aligning the BSC with other operational processes and

systems Failure to evolve and change the BSC as and when strategies

change over time

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