Supply Chain Management: From Vision to Implementation

1. Supply Chain Management: From Vision to Implementation Chapter 13: Performance Measurement

2. Chapter 13: Learning Objectives • Describe the role of measurement in shaping a company’s culture and achieving results. • Discuss the strengths and weaknesses of traditional measurement practices. • Explain how world-class SC measurement improves alignment, emphasizes customer orientation, promotes process integration, and facilitates collaboration.

3. Chapter 13: Learning Objectives • Identify and implement appropriate measures to manage and monitor important processes and relationships. Create unique, tailored measures. • Benchmark performance measures and leading-edge SC practices.

4. Role of Performance Measurement When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates. - Thomas Monson

5. Measurement Creates Understanding • Performance measurement systems provide insight into the nature and workings of value-added processes. • A well defined performance measurement system provides feedback regarding: • Customer requirements • Company and supplier capabilities • Probable success of collaborative initiatives

6. Measurement Drives Behavior • Measurement is more critical than communication, training, or perhaps anything else when it comes to managing human behavior. • Measurement’s influence on behavior is pervasive because people pay attention to how they are measured. • Managers must adopt measures that truly promote collaborative behavior.

7. Measurement Leads to Results • Measurement is a prerequisite for high level execution and attainment of world-class results. • Well-designed measurement systems must provide accurate and relevant information in a timely manner. • Incorrect measurement systems lead to non-aligned strategies, poor understanding, and inconsistent if not counterproductive behavior.

8. Traditional Measurement Areas that are essential to measure to accomplish customer service and profitability goals: • Asset Management • Cost • Customer Service • Productivity • Quality

9. Measures of Asset Management • Capital investments are made in facilities, equipment, technology, and inventory. • Asset management measures give managers means to judge the efficient and effective use of capital. • Recent advances have changed conventional wisdom with regard to asset management. • JIT/Lean • Theory of Constraints

10. Measures of Asset Management

11. Measures of Cost • Cost performance is critical and tracked more carefully and comprehensively than any other aspect of competitive performance. • Cost-cutting cannot be done at the expense of core capabilities. • Best practice requires companies to identify activities that most impact total cost, adopt appropriate metrics, and manage to those metrics.

12. Measures of Cost

13. Measures of Customer Service • Customer service metrics measure the ability of the firm to produce the right quantity of product and deliver when and where it is needed. • Time metrics are used as benchmarks for flexibility and responsiveness. • Customer complaints are also tracked.

14. Measures of Customer Service

15. Measures of Productivity • Productivity is the ratio of total output to total input. • Productivity growth must not come at the expense of quality or customer satisfaction.

16. Measures of Productivity

17. Measures of Quality • Measures of quality track the functionality or reliability of a product or service. • Six Sigma targets a quality level which achieves defect rates of less than 3.4 ppm

18. Measures of Quality

19. Traditional Measurement - Caveats • Traditional measurement systems are not holistic, they are designed to capture and communicate primarily functional information. • Traditional measures are primarily oriented to short-term financial results and cost-cutting.

20. Contemporary Supply Chain Measures Measurements consistent with supply chain management core principles emphasize: • Goal alignment • Customer satisfaction • Process integration • Total costs • Inter-organizational collaboration

21. SC Measures - Alignment What gets measured, gets done! - Tom Peters • Often there is little relationship between strategic intent and measurement. • Leads to dysfunctional behavior • Supply chain managers must align key measures within their own organization as well as within the supply chain.

22. SC Measure Alignment - Traditional

23. SC Measures – Customer Satisfaction • Traditional customer service measurements often do not provide a clear understanding of customer expectation or satisfaction levels. • Internal service measures do not identify what the customer values or their perception of the value they receive.

24. Traditional Practice Internal service measures over satisfaction measures Measures that are expressed as averages Measures that treat all customers the same Best-In Class Practice External assessment that reveals what customers really think is important Absolute measure expressed in customer centric terms Measures that recognize unique needs of individual customers Customer Satisfaction Metrics

25. SC Measures – Total Cost • Total costing is a prerequisite to good process design and management • Total cost is the sum of all the costs incurred in planning, designing, sourcing, making, and delivering a product from raw material to the final customer. • Managers lacking accurate total cost information make decisions that favor their own company’s financial performance when making trade-offs within the supply chain.

26. Availability Of Logistics Information

27. Total Supply Chain Cost Total supply chain costs are the sum of all costs incurred in planning, designing, sourcing, making, and delivering a product from raw materials to the final customer.

28. SC Measures – Activity Based Costing • Activity based costing links costs directly to the activities that drive them. • ABC costing requires process transparency and detailed information on products, customers, activities, and resource costs.

29. Activity-Based Costing

30. Supply Chain Performance Measures • Superior supply chain performance moves beyond simple functional excellence. • New measures are required to facilitate collaboration throughout the entire supply chain.

31. Aligned with organizational goals Aligned with project goals Customer oriented Meaningful to workers, managers, & customers Consistent across appropriate functions or departments Promotes cooperative behavior both horizontally & vertically Communicated to all relevant individuals Simple, straightforward, & understandable Easy to collect the needed data Easy to calculate Available on a timely basis—real time when possible Strategic and tactical Quantifiable Designed to drive appropriate behavior Designed to drive learning & continuous improvement Designed to provide information that is actually used in decision-making Characteristics of Effective Measures

32. Supply Chain Performance Measures

33. Supply Chain Performance Measures

34. Supply Chain Performance Measures • Measures of supply chain performance: • Supply chain inventory days supply • Supply chain response time • Total supply chain costs • These measures allow for identification of inefficiencies throughout the entire supply chain.

35. Cash-to-Cash Cycle Time

36. Order-entry error Ordered item is unavailable Incomplete paperwork Picking error Customer deduction Damaged shipment Overcharge error Error in payment processing Missing information Late shipment Inability to meet ship date Early arrival Inaccurate picking paperwork Invoice error Credit hold Perfect Order Busters

37. SC Measures - Scorecards • Process encompasses objectives, measures, targets, and action plans. • Typical scorecard emphasizes cost, quality, delivery, responsiveness, and innovation. • Provide mechanism for evaluation and communication of performance along critical dimensions.

38. SC Measures - Scorecards • Help companies select and monitor both suppliers and customers • Support recognition programs • Benchmark leading-edge practices • Disseminate best practices throughout the supply chain • Identify deficiencies that can be overcome through continuous improvement efforts

39. Supplier Scorecard

40. Benchmarking • The formal process of comparing the attributes of one organization to those of another. • Process consists of: • Define attribute to be benchmarked and identified a best in class comparison company. • Document the best in class process at strategic and operational levels. Compare with current practice specifying any and all differences. • Develop a strategy, complete with specific methods, for adopting best practices.

41. Benchmarking - Types • Competitive Benchmarking – evaluating best practices of leading competitors within industry. • Noncompetitive Benchmarking – evaluating best practices regardless of industry. • Internal Benchmarking - large global firms may find opportunities to disseminate best practices within the organization.

42. Benchmarking - Caveats • Effective benchmarking depends on the competitive attitude of management. • Benchmarking alters manager’s perception of their own company’s performance. • Active benchmarkers are more likely to recognize deficiencies. • High performing SC companies are likely to be active benchmarkers.

43. A Return to the Opening Story Based on what you have now read and discussed: • What issues have led to Olympus’ measurement problems? Are these unique to Olympus? • What else needs to be on the list? What are the important roles of a measurement system? • How would you suggest the task force create a world-class measurement system?