Supply Chain Performance Management:It's More Than Metrics
Establishing metrics to track supply-chain performance seems, on its face, like a fairly simple and straightforward undertaking. If one is interested only in measuring siloed, functional performance, this perception is true. But most companies today need to understand performance in terms of the overall, inter-enterprise supply chain and be able to tie that overall performance to strategic corporate objectives - a far more complex task.
"I see companies beginning to think of performance measurement as a more critical part of their overall strategy and as a way to help with their top line as well as their bottom line," says Shoshana Cohen, lead partner in the worldwide supply-chain practice of Pittiglio Rabin Todd & McGrath (PRTM), Waltham, Mass. "So the trend we see is to base evaluations of supply-chain effectiveness on these two things. It's an approach that goes beyond tracking inventory turns or on-time delivery."
Breaking out of traditional siloed metrics begins with top-level strategic planning. "Companies need to say, 'OK, what is my strategy here? Given that strategy, what does our supply chain need to excel at doing?' says Cohen. "Maybe it needs to be really fast, or really flexible or really inexpensive. Whatever it is, you need to pick metrics designed to measure that capability."
"I wouldn't say everyone is doing this, but I do think more and more companies are starting to understand that this is a much more effective way of managing their performance," she says. (Cohen and co-author Joseph Roussell detail this approach in their recent book, Strategic Supply Chain Management: The 5 Disciplines for Top Performance, published by McGraw Hill.)
A strategic approach to supply-chain performance also is being driven by the growing use of balanced scorecards at many large companies, says Steve Banker, director of supply-chain services at ARC Advisory, Dedham, Mass. At the beginning of the year these companies establish their most important financial goals as well as goals in other areas. "Many of these top goals have supply-chain components," Banker says. "So if a company wants to improve its cash flow, for example, that may drive a number of key performance indicators (KPIs) for supply-chain managers and line employees, such as speeding order processing and improving order accuracy and fill rates."
Establishing the proper KPIs, and targets for each, is an important next step and one that can be especially difficult when cross-functional or cross-enterprise agreement is required, says Cohen. "When I say shipping really fast, do I mean on time to when people asked for it, on time to when I committed, or any time that is better than my competition? Everyone has to agree on the definitions."
Companies also need to eliminate superfluous measures and stick to those that will drive the desired result. "A lot of people measure everything because they feel safe having a lot of information, but only a limited number of things can be tweaked to get operational improvements," says Paul Hoy, director of manufacturing and industrial marketing at Cognos, Ottawa, a leading provider of scorecards and enterprise performance management solutions. Also, he says, it is important to understand the cultural implications inherent in the choice of metrics. "Everyone says that you can't change what you don't measure, but the corollary is also true - you should only measure what you are willing to change."
Targets for each KPI capture the level of improvement desired. "Targets should be aggressive but achievable," says Cohen. "They are essential because if I tell you that you are operating at X and don't tell you where you need to be, you don't have any way to gauge whether your performance is good or bad." There are many ways to determine targets, from benchmarking to customer feedback, she says. "Then, along with a target, you need a plan to get there. There is no point in setting very aggressive targets and having nothing to back it up, so you must have initiatives that are going to move you toward the goal," she says.
The final step is actual implementation, where a company identifies data sources, starts collecting the data and creates an appropriate format for communicating it, Cohen says. Lastly, but importantly, "you have to have commitment to actually review this information," she says. "There are a lot of metrics being generated out there that no one is looking at."
Analytic Engines
A number of technology solutions are available that enable companies to gather and monitor data to track performance against KPIs and to take appropriate action. Generally referred to as Supply Chain Performance Management, these applications couple visibility and event monitoring with sophisticated analytic engines that get to the root cause of problems and spot emerging trends. As corrective action is taken and validated, continuous improvement occurs.
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| "You should only measure what you are willing to change." - Paul Hoy of Cognos | |
This four-step process begins with collecting a lot of data from systems throughout the supply chain. "This data usually already exists in applications but is not being used in a real-time format," says Hooman. "We suck that data from various silos and aggregate it into our system. So, for example, if there is a company that wants to look at how each of its suppliers is performing on a perfect-order metric to a certain distribution center, they are able to pull that information and drive that specific metric." An alert is set, so that if this supplier drops below a certain threshold, the person responsible for that KPI is informed. "That person can then drill down to see what is behind the problem and can make a well-informed decision, hopefully in collaboration with the supplier," says Hooman.
Information is presented in a hierarchical way, with KPIs giving a 50,000-foot "red, yellow or green" view as to the overall picture. Problem areas can be easily identified and investigated in a way that puts the problem in context.
Flextronics, an electronics manufacturing services company based in Singapore, uses the SeeCommerce solution to improve performance in direct materials purchasing, among other areas. "We wanted to get better visibility into purchasing to improve our spend management," says Mike Glass, director of supply-chain tools at Flextronics. "With SeeChain, we can drill down by supplier, by manufacturer, by distributor, by customer, by commodity code and we can do it by individual site, by region or sub-region, so there is a lot of flexibility as to how we can analyze the information."
Global visibility to inventory also enables Flextronics to move inventory within its system, rather than purchasing more supplies. "If a site has a shortage or excess on a particular part, it can enter that part number and get visibility of potential availability or demand at other sites," notes Glass. "That is a key benefit."
Some vendors are offering performance management solutions designed for specific parts of the supply chain. FORTE, Cincinnati, Ohio, recently introduced CONTINUIMi, designed to monitor performance and enable continuous improvement in automated distribution centers. This solution pulls data from all the systems in the DC into a central repository and then applies business intelligence to give the distribution manage a dashboard that shows the DC's performance, says Louis Hollmelyer, director of marketing. "With easy access to performance metrics, the DC manager is empowered to identify variability within the warehouse and take steps to ramp up, or alternatively, take measures to circumvent bottlenecks," he says.
Data Warehouse
When companies are dealing with a lot of data it helps to have a data warehouse. SeeCommerce recently partnered with Teradata, a Miami-based provider of data warehousing and analytic technology, to create a performance management solution for the retail industry. This solution is specifically designed to improve the level of store out-of-stocks through early identification of low inventory situations.
The partnership developed when both companies were working with the same retail customers to deliver different aspects of supply-chain performance management. The result is a highly scaleable solution that enables detailed analysis of inventory at a very granular, SKU level.
On its own, Teradata offers a Supply Chain Intelligence (SCI) solution that includes predictive modeling capability, enabling companies to see how current operational issues will impact future performance. With a very robust data warehouse foundation, "we offer a system that has a place to put all that event data - data that can come from both inside and outside the four walls," says Cheryl Wiebe, professional services director at Teradata's SCI Center of Excellence. "Basically, we take as many measurements across the global supply chain as possible and derive performance metrics from those raw observations. Then we feed that back to the various audiences in a form that is actionable, and hopefully in advance of when they need to act to solve the problem."
A data warehouse also enables more creative types of analysis, says Jerry Hill, director, Center of Excellence at Teradata. "There really is very little value in just aggregating information, but there is huge value in pulling together the atomic detail. You might have financial data in one system silo and supply-chain data in another silo. If both were in a data warehouse you could start looking at things like margin contribution by product or by customer. If you can get the data in one place, clean and organized, then there an incredible amount of return on investment that you can glean."
Such analysis can sometimes lead companies to rethink their strategic plan, says Hoy of Cognos. "Let's say I am not hitting my shipment target, but that really is a function of the fact that the economy hasn't improved the way I thought it would. I probably need to go back and revise my plan. If North America is soft, perhaps I can change my product mix to sell more in Europe and see what the impact of that would be. So you plan your performance, monitor your performance and understand your performance so you can replan and rework targets as needed to stay on track."
Cognos recently partnered with Deloitte Consulting to offer a joint solution: Supply Chain Performance Accelerator. "The combination of Deloitte's ability to come in and work with the supply-chain executive and consult around what metrics are going to drive the biggest return, and then Cognos's ability to provide scorecards and business intelligence that monitors performance against those key metrics in a way that enables action - that is the strength of the relationship," says Hoy.
Some solution providers in this space are offering "virtual" data warehouses. Vanguard Solutions, Glen Ellyn, Ill., has a business intelligence solution called Graphical Performance Series (GPS) that can provide monitoring and analysis without gathering the data into one central location, according to Michael Powers, director of marketing. "Historically, business intelligence solutions have relied on a data warehouse, which is expensive and requires a significant investment in time, people and effort to align all those data sources," he says. "Our technology, which we call Direct Access, allows a user to access the operational data stores where they sit, in real time. So the intervening step, where all these data sources have to be aligned and terms have to be agreed on, is eliminated and made virtual." A business user can get the information he needs "in an integrated view and in real time without having to make the investment required by a data warehouse."
Meg Lloyd, senior director of supply-chain business intelligence at Oracle, Redwood City, Calif., says Oracle's solution also avoids data consolidation. "Historically, companies have sort of thrown all the information into a data warehouse, believing that if they put all of their data into a single database they could actually eliminate the problem of silos and everybody would share information and be working off the same playbook," she says.
"What we actually find is that when a company builds a data warehouse, the focus becomes one of getting the data from the source systems into the warehouse. People are still left to their own devices to develop reports or write queries and it is a very time consuming process. So what we are focusing on - and what we think is the right way to do it - is to keep management reporting in the same system with the transactions themselves so that they bring along with them all the context of why the transaction happened."
That approach enables users to drill into the information and explore the metrics all the way down to the very transaction that may have caused the problem, she says. "And by leaving everything in the same system or in the source instance where the transaction occurred, they can actually drill through a transaction and fix the error if something is wrong." Of course, this process begins with structured KPIs, "presented in a way that interests a manager at the start of the day and that quickly communicates how the company is doing."
Cash-to-Cash Cycle
As cash flow gains in importance as an overall corporate metric, cash-to-cash cycle time is gaining in importance as a supply-chain performance metric. "Companies are just now starting to understand the capital cost side of the supply chain and the cash flow impact," says John Cummings, a managing director at BearingPoint, McLean, Va. "If a company is able, for example, to replenish stock more frequently, by definition its supply chain speeds up, inventory turns increase and capital requirements to feed that engine go down. It is what I call the cash- flow supply chain."
M. Theodore Farris, professor at the University of North Texas, presented a workshop on the cash-to-cash metric at the recent Council of Logistics Management conference in Philadelphia. This metric is easy to calculate because the data can be taken right off the balance sheet, he said, but the drawback is that the numbers are an aggregate and don't give granular detail.
The cash-to-cash cycle is calculated by adding days of accounts receivable to days of inventory on hand. From this total is subtracted days of accounts payable. Dell focused everyone's attention on this measure, said Farris. Looking at Dell's financial reports, Farris determined that the computer maker reduced its cash-to-cash cycle from minus four days in 1997 - already far better than most companies - to minus 36 days in mid 2004. This means that Dell essentially is using its suppliers' money to run its operations.
The company accomplished this by shortening its production cycle, extending accounts payable from 54 to 71 days and reducing average accounts receivable from 37 to 31 days. And it continues to work at improving these metrics even further.
"What really matters is cash. It is the ultimate business scorecard," says Farris. After studying the cash-to-cash cycle of more than 20,000 companies, Farris found that in 20 out of 30 industries, there was a direct correlation between lower cash-to-cash performance and higher profitability.
Financial reporting required by the Sarbanes-Oxley Act also promises to have an impact on supply-chain performance activities. "CFOs need to be able to report quickly on events that will materially impact quarterly earnings," says Banker. "Many such events could be directly related to the supply chain." Banker says CFOs are asking for an integrated enterprise risk management portal that will be based on various monitoring applications and that can identify negative trends. "This would allow companies to correct something before it materially affects earnings, if possible, or, if not, it would at least give the CFO the tools to report as required by law."
SeeCommerce recently introduced an application called Operations Drives Finance designed to help companies with Sarbanes-Oxley reporting. "A lot of the issues that impact financial performance have their root cause in operations, so tying the supply chain to the financial impact of those operations is key," says Hooman.