Supply Chain Management Lecture 13 – Measurement & Metrics Alexa Kirkaldy

Lecture 13 - Learning Objectives On completion you will be able to: Discuss some of the weaknesses of traditional measurement systems Explain how the balanced scorecard and supply chain measurement systems can help improve alignment, emphasise customer satisfaction and promote process integration. Be aware of the SCOR model.

Measurement Clichés “If you can’t measure it, you can’t manage it.” “What gets measured gets done.” Tom Peters “When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates.” Thomas Monson “Not everything that counts can be measured, and not everything that can be counted counts.” Albert Einstein Measurement creates understanding Measurement drives behaviour Measurement leads to results Fawcett, Ellram and Ogden, “Supply Chain Management”, 2014, Chapter 13

Great Visionaries! But what is the message? 1. “ Everything that can be invented has been invented” (Charles H. Duell, Commissioner, US Office of Patents, 1899). 2.“This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication ” (Western Union internal memo, 1876). 3.“Heavier-than-air flying machines are impossible” (Lord Kelvin, President, Royal Society, 1895). 4.“Who the hell wants to hear actors talk?” (H.M. Warner, founder of Warner Brothers, 1927). 5.“I think there is a world market for maybe five computers” (Thomas Watson, Chairman of IBM, 1943). 6.“There is no reason anyone would want a computer in their home” (Ken Olson, founder of Digital Equipment Corp., 1977). Change is CONSTANT !

Traditionally most measures are functional Key end-to-end Supply Chain metrics must replace the traditional metrics Metrics in the traditional supply chain reflect its fragmented nature$$$ u Cash to Cash u Inventory Days of Supply u Supply Chain Response Time u Total Order Fulfilment Lead Time $ u With only financial metrics being cross-functional

Evolving characteristics of Customer Satisfaction metrics Traditional Practice EmphasizesBest in Class Emphasizes Internal service measures over customer satisfaction measures External assessment that reveals what customers really think is important Measures that are expressed as averagesAbsolute measures expressed in customer centric terms Measure that treat all customers the sameMeasures that recognize unique needs of individual customers

Traditional Measurement Fawcett, Ellram and Ogden, “Supply Chain Management”, 2014

Framework for supply chain measurement Delivery performance –Delivery compared to customer request date –Delivery compared to commit date Responsiveness and flexibility –Order fulfilment lead time –Supply chain response time Total Supply Chain Cost –Total acquisition cost / total cost of ownership –Customer order management costs Cash to cash cycle time –Inventory days of supply –Cash to cash cycle time

Time The right… Place Condition Quantity Cost Product Customer Rushton, Croucher and Baker (2010) Great delivery performance Delivery Performance

Supply Chain Response Time Re – plan response time + Source response time + Make response time + Deliver response time

Total Supply Chain Cost Order management cost + Material acquisition cost + Inventory carrying cost + Supply chain finance, planning and execution cost. + Market mediation costs

Cash to Cash Cycle Cash-to-cash cycle time: Average days to turn a dollar invested in raw material into a dollar collected from the customer = Total inventory days of supply + days receiveable – days payable Inventory: Inventory days-of-supply or ratio of inventory to cost of goods sold.

SC Inventory Days of Supply Total number of days of inventory required to support the supply chain - from raw materials to the final customer acquisition. Expressed as calendar days of supply based on recent actual daily cost of sales Cash to Cash Cycle Time The time required to convert a dollar spent to acquire raw materials into a dollar collected for finished product ( total inventory days of supply + days sales outstanding - days payable outstanding) Inventory Dwell Time The ratio of days inventory sits idle to days inventory is being productively used or positioned Customer Inquiry Response Time The average elapsed time between receipt of a customer call and connection with the appropriate company representative Customer Inquiry Resolution Time The average elapsed time required to completely resolve a customer inquiry Order Fulfilment Cycle Time The average actual lead times consistently achieved, in calendar days, from customer order to customer delivery. On Shelf In Stock Percentage The percentage of time that a product is available on the rack, shelf or wherever the customer expects to find and buy it. Perfect Order Fulfilment A perfect order is one that is delivered complete, on time, in perfect condition and with accurate and complete documentation. Fulfilment is the percent of order that are perfect ( perfect orders / total orders) Source / Make Cycle Time The cumulative time to build a shippable product from scratch, starting without inventory in stock or on order. Supply Chain Response Time The theoretical number of days required to recognize a major shift in market demand and increase production by 20 % Total Supply Chain Cost The sum of all the costs incurred in planning, designing, sourcing, making and delivering a product broken down for each member of the supply chain Value Added Productivity Total company revenues generated less the value of externally sourced materials expressed as a ratio of total company headcount. Other Supply Chain Performance Measures

Linking Measures Corporate Mfg Director Plant Manager Department Manager Process Drivers Return on assets Inventory days Output/ Equipment $ Output/ Square metre Occupied Manufacture Cycle Time Finished Goods Inventory Days Days Vendor Lead Time Machine Down Time % Good Output Total Output % Unplanned Schedule Changes Defective Sub-assembly Parts Availability Wait on QC No Man power Power Failure Change- over Times Beischel and Smith (1991)

Difficulties of aligning measures in a single firm Adapted from Ray Martin (1997) Corporate Strategy Corporate Plan Integration of Functional Objectives Marketing Strategy Financial Strategy Manufacturing Strategy HRM Strategy Innovation Strategy Operational & Departmental Strategies Mainly Financial Measures Mix of Financial & Non- Financial Measures Mainly Non- Financial Measures Performance measures satisfying functional strategies Performance measures satisfying strategic plan

Kaplan & Norton’s Balanced Scorecard How do our customers see us? Customer perspective How do we look to our shareholders? Internal business perspective Linking long term strategy to short term actions Financial perspective Can we continue to improve & create value? What must we excel at? Innovation and learning perspective

Linking SCM to the Balanced Scorecard Harrison A. & van Hoek R., Logistics Management and Strategy, 2012.

Tesco Wheel ‘Our management tool called the Steering Wheel is divided into four quadrants – Customer, Operations, People and Finance – which, in turn, are divided into several segments, each with a set of Key Performance Indicators (KPIs) which are based on demanding but achievable targets’

Supplier Plan Customer Customer’s Customer Suppliers’ Supplier Make Deliver Source Make DeliverMakeSource Deliver Source Deliver Internal or External Your Company Source Supply Chain Operations Reference Model (SCOR) SCOR Model Return Building Block Approach ProcessesMetrics Best PracticeTechnology

Types of Benchmarking  Internal –comparing internal operations across departments of business units  Competitive –comparing the product or operations with a direct competitor  Functional (or industry) –comparing similar functions in the same broad industry  Generic –comparing business functions or processes regardless of industry  Customer –comparing performance against customer expectations

SCOR: Strategic, Tactical, Operational Supply Chain Performance Metrics Framework, Gunasekaran, Production Economics (2004)

Things to do! Read the case study Possible oral presentation questions How is performance measured in this industry or firm? Who is the best supply chain manager in this industry and what should be the benchmarks for performance?

Lecture 13, Key Points & Tips Based on Fawcett, Ellram and Ogden, “Supply Chain Management”, A firm’s ability to monitor and evaluate its value-added processes & work effectively with supply chain partners depends on its measurement capability Traditional measurement has focused on asset management, cost, customer service, productivity and quality. Measurement can be used to create alignment and should try to link strategy to measurement, align measures across functional areas and align measures vertically in the firm and through the supply chain. Customer focussed measures must find out what customers value and how they evaluate performance. Process costing using techniques such as Activity Based Costing and total cost of ownership are critical in making trade-offs visible. Benchmarking is a useful tool in establishing objective targets and identifying new methods for improvement, so called best practices. The balance scorecard approach can be used to overcome some of the weaknesses of traditional measurement systems by incorporating financial and non financial measures, communicating results more effectively and encouraging improvement. Firms and individuals find it hard to focus on more than 10 individual metrics and a range of 6 to 10 is normally recommended. The SCOR model can help in to benchmark and measure supply chain performance. Other models such as the EFQM model could also be used. The AMR and Gartner research provides a useful guide to the top 25 supply chains.