SCM METRICS -Presentation 1 BY K.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 K.Sashi Rao/2011

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. K.Sashi Rao/2011

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. K.Sashi Rao/2011

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 K.Sashi Rao/2011

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) K.Sashi Rao/2011

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) K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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) K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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) K.Sashi Rao/2011

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 K.Sashi Rao/2011

-Non-Financial Measures 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. K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

SCM Performance Benefits More business growth - 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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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” K.Sashi Rao/2011

SCOR Model - 5 Core Management Processes K.Sashi Rao/2011

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 K.Sashi Rao/2011

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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 K.Sashi Rao/2011

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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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

Typical SCOR Model Results(1) (Source: www.supply-chain.org) SCOR Measures Unit of Measurement Median Class Best in Delivery performance Percentage 81% 96% Upside performance flexibility Number of days 42.0 8.3 Cash to cash cycle 66.6 24.7 K.Sashi Rao/2011

Typical SCOR Model Results(2) (Source: www.supply-chain.org) Supply Chain Cost/Industry Unit of measurement Median Class Best in Consumer packaged goods SCM cost % to Revenue 11.2 5.3 Chemical and Pharmaceuticals 9.8 4.0 Telecom Equipment 8.5 3.3 Defense and industrial 10.2 4.5 Computers and Electronics 9.1 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011

BSC as a measurement system Financial To succeed financially how should we appear to our shareholders ? Internal Service Process To satisfy our shareholders and our customers that what business processes we must excel Customer Relations To achieve our vision how should we appear to our customers? VISION AND STRATEGY Learning, Innovation and Growth To achieve our vision how will we sustain our ability to change and improve ? K.Sashi Rao/2011

BSC as a strategic management system Translates strategy into: Objectives Measures Targets Initiatives Each of the 4 perspectives will need these above attributes K.Sashi Rao/2011

BSC triangle Strategy/Goals Objectives Measures Mission Vision Desired state Differentiating activities What must be done well to implement strategies How strategic success is measured Mission Vision Strategy/Goals Objectives In each perspective Measures In each perspective K.Sashi Rao/2011

Financial 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 Print for group K.Sashi Rao/2011 48

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 Print for group K.Sashi Rao/2011 49

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 Print for group K.Sashi Rao/2011 50

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 Print for group This perspective is the foundation for all other perspective measures…like the roots of a tree K.Sashi Rao/2011 51

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 K.Sashi Rao/2011

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 K.Sashi Rao/2011