Supply Chain

Management
Metrics
UNIT 1 LECTURE 7 &8

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
2

Why measure supply chain

performance
Competitive environment calls for speedy, cost efficient and
reliable supply chain
Supply Chains have a huge leverage on creation of customer
value
Todays competition is supply chain versus supply chain
What gets measured, gets improved
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
3

Supply Chain Performance Management key

points
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)

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 ROA
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

Performance vis--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

Raising the Performance Bar for

competitive advantage

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)

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
9

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.

10

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
11

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

12

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

13

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

14

Measurement Approaches
Supply Chain Councils 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

15

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

16

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

17

SCOR Model
- 5 Core Management Processes

18

SCOR is further divided for each entity in

supply chain

19

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

20

SCOR MODEL -Methodology(1)

Level 1:

Analyze Basis of Competition

Level 2:

Configure Supply-Chain

Level 3: Align Performance Levels, Practices and

Systems
Level 4: Implement Supply-Chain
Systems

Processes and

21

SCOR MODEL -Scope

22

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

23

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
24

SCOR Model Measures

-internal facing

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
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

25

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
26

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

27

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

28

Typical SCOR Model Results

(Source: www.supply-chain.org)
SCOR
Measures
Delivery
performanc
e
Upside
performanc
e flexibility
Cash to
cash cycle

Unit of
Median
Measureme Class
nt
Percentage 81%

Best in
Class

Number of
days

42.0

8.3

Number of
days

66.6

24.7

96%

29

Typical SCOR Model Results

(Source: www.supply-chain.org)
Supply Chain
Cost/Industry

Unit of
measurement

Median
Class

Best in
Class

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 and
Electronics

SCM cost % to
Revenue

9.1

4.0
30

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 firms
strategic objectives

31

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

32

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

33

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 firms Key Success
Factors or Key Performance Indicators
34

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

35

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
36

BSC as a measurement system

Financial
To succeed financially
how should we appear
to our shareholders ?

Customer
Relations
To achieve our vision
how should we appear
to our customers?

VISION AND
STRATEGY

Internal Service
Process
To satisfy our shareholders
and our customers that
what business processes
we must excel

Learning,
Innovation and
Growth
To achieve our vision
how will we sustain our
ability to change and improve ?

37

BSC as a strategic management

system
Translates strategy into:
Objectives
Measures
Targets
Initiatives
Each of the 4 perspectives will need these
above attributes

38

BSC triangle
Desired state

Mission

Vision
Differentiating activities

What must be done

well to implement
strategies
How strategic

Strategy/Goals
Objectives
In each perspective

Measures
In each perspective

success is
measured

39

Financial Perspective
What financial steps are necessary to ensure the execution of
our strategy/goals?
Are the programs/ departments goals, implementation, and
execution contributing to the bottom line?
Are we meeting operational and financial targets?
Dimensions of Quality:
Efficiency

40

Customer Relations Perspective

Who are our target customers?
How do our customers see us?
How do customers rate our performance?
Dimension of Quality:
Accessibility
Acceptability
Continuity

41

Internal Service Process Perspective

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

42

Learning, Innovation and Growth

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

43

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 firms 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

44

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

45

Customers Use These Measures to Evaluate Your

Performance?

46