So, here’s a common scenario. The supply chain vice president (SCVP) presents to the chief executive officer (CEO) and chief financial officer (CFO) that he believes he can reduce inventory by 30 percent.
“Wow, that’s great!” says the CFO. “How are you going to do it?”
The SCVP responds, “We can implement a new software application for inventory optimization. It will only cost $100,000 and the ROI is less than nine months.”
“Really?” counters the CFO. (The CEO has stepped out to take a call). “We don’t have $100,000 in capital at this time. And, there are at least four other projects already in the capital appropriation process that will take priority over you doing your job, which is to reduce inventory.”
“And, by the way,” the CFO adds, “one of those projects will also reduce inventory.”
“Really?” I asked.
“Yeah, the VP of Manufacturing needs a new filling machine for $400,000 or he won’t be able to meet production. No filling machine, no product, and no inventory… capiche? Go do your job!”
Sound familiar? Let’s replay the scenario. Only this time, I will be the SCVP. In the same meeting with the CEO and CFO, only I kick it off by saying, “I think I found a way to get $41m in capital.” (Inventory is $136.9m; 30 percent is around $41m.)
The CEO leaning forward, says, “When?” Turning away from me for a moment, “Excuse me, tell them I am in a meeting and will call them back.” Turning back to me, “Okay, when?”
“I am confident we can get it all in about 9 to 10 months, definitely by Q4,” I respond.
The CFO chimes in, “Okay, sounds good; but, what is going to take?”
“We’ll only need about 2% of it. I figure somewhere south of $800,000 should do it,” I respond. (Hey, I am giving them $41m cash. Why should I only ask for a measly $100,000? I have a transformation to fund here. If I asked you, right now, for $10 and guaranteed you by year end that I would hand you $450 in return, would you do it?)
“Bingo! You got it!” says the CEO, seconded by the CFO.
“By the way, is this part of that transformation project you’ve been noodling?” the CEO adds.
“Yep, just an early phase,” I respond.
The CEO pulls the CFO aside for a moment, then comes back at me, “Tell you what, Rich, why don’t you pull together a plan for the whole enchilada, run it by me and the finance guys; and, we’ll put it on the Board agenda for Q3, after we see the results of the working capital project? Count on me and the CFO for any support you need. Wow, an unplanned $41m in the bucket this year? That’s going to make the shareholder meeting fun again.”
You Can’t Manage What You Can’t Measure
Peter Drucker, the world renowned writer, management consultant and university professor said, “If you can’t measure it, you can’t manage it.” Whether you are trying to get management buy-in, start your transformation journey, or just manage your operations, it’s critical to be able to measure the performance of the operations. Before we can identify the financial value resulting from our transformation, I think it’s important to look at what we measure in supply chain management so that we can effectively translate our performance and transformation initiatives to the financial performance of the organization.
So, as part of my work at CSCMP, I developed a performance management workshop with Kate Vitasek’s company, Supply Chain Visions, and specifically with Mike Ledyard, one of her senior consultants. Ledyard, in fact, when he was CSC Consulting, had co-authored a CLM (now CSCMP) published book on supply chain performance measurement. During the course of developing the workshop, I really liked one of Supply Chain Visions’ slides depicting the “Building blocks of successful performance management.”
Knowing that performance measurement and metrics are critical components of a supply chain transformation, especially when it comes to integration with the demand performance structure (financial group) and gaining executive and financial management confidence, I decided to adapt it for purposes of this book. Obviously, I have my own cut on the topic; and, with my background with SCOR® and technology, I felt I needed to develop a simple way to communicate to management why transformation is critical to the profitable growth of the company. So, if you’re going to be a resident of Leader City, you’re going to have to have a place to live.
Taking the base graphical context of the “Building blocks of successful performance management,” I adapted it and developed the “The House of Excellence” that you can use with your team to architect a performance management operating system in the business context. To a large extent this book is about transforming your organization to build the House of Excellence as your residence in Leader City.
When we developed SCOR®, it was our intent to have a set of practitioner-maintained industry standard performance metrics available to anyone in the industry. And, we wanted the enabling technology providers to build them into their offerings. Both Oracle and SAP use SCOR® metrics as a basis for performance management functionality in their applications. So, why reinvent the wheel?
The key though is not just the metrics. There are over 550 metrics defined in SCOR®. The key is which of them to implement and how you go about implementing them. That’s why the foundation for your House of Excellence is performance management aligned to your strategy. I don’t think you want to implement all 550 metrics? It would probably drive you and your organization batty. Aligning your performance management operating system strategy and implementation to the corporate business strategy will enable you to select and implement only those metrics that you need to achieve success.
We’ve already talked a bit about business strategy in the past chapters. If your strategy is volume growth based on being the lowest-cost provider, Wal-Mart comes to mind. Your metrics will be focused on the performance attributes of asset management and cost reducing processes, such as the overall cost of supply chain management at the highest level. You would then measure the cost of the supply chain types comprising the next level of supply chain costs, such as cost to plan, source, make, deliver and return. You would then break these metrics down further to the category and element level. Cost is critical to meeting your strategy, so you would align your supply chain performance metrics accordingly. You would, at a high level, develop process type metrics for the other performance attributes; but, you would probably not dive too deep. Metrics drive behavior and you want your performance measures to align supply chain behavior with the company’s business strategy.
I remember a past client’s director of logistics as being a brilliant strategist; he was very customer focused and a long-term thinker. He was transforming the supply chain organization based on doing the right things. However, the CEO was concerned with short-term profitable growth and pushing the revenue envelope at the lowest possible cost. He was a turnaround executive brought in to drive financial stability and grow the business. Remember that if you can’t bill it; you can’t ship it. The strategies of logistics and the business were out of line… and, it came time for my colleague to find new employment. During the debrief, the director of logistics was devastated; but, in the long run, it was the best thing that ever happened to him. Both he and the CEO were right… it was their strategies that were misaligned. And, CEO trumps director. It was the best thing that ever happened to the director of logistics who went on to a long and great career as a president in an industry driven by meeting customer expectations.
If your strategy is profitable growth through superior customer service, another example of aligning supply chain strategy is Neiman Marcus. You may consider cost an important metric, but your focus and your performance measurements will be much more driven by reliability and responsiveness attribute metrics. Perfect Order Fulfillment would be a critical metric –100 percent customer satisfaction, 100 percent of the time. You may set your strategy around cycle times and in stock performance. You would take the metrics for reliability and responsiveness from the type level one, through to category and element levels two and three, and maybe even to the activity and workflow level.
The attributes of supply chain performance, according to the Supply Chain Council (and, a large community of users) are:
• Reliability– how well do I meet my customer’s expectations?
• Responsiveness– how long does it take to meet my customer’s expectations?
• Agility– how quickly can I scale up or down?
• Costs– What does it cost me to operate my supply chain?
• Asset management– What are the capital requirements for me to operate my supply chain?
If you set your performance management objectives and measurements along these attributes to align with the business strategy (demand performance structure), then I don’t think senior management is going to have an issue. And, presenting your supply chain strategy, with the understanding that you are driving performance to achieve the business strategy and objectives, who can argue? Laying the foundation of your transformation’s House of Excellence to meet the business strategy, financial objectives, and Board/Executive Management expectations is the first step toward obtaining management commitment; and, a great ongoing communication and progress monitor.
The first pillar of the House of Excellence is to base your performance on process-oriented metrics. As we discussed in detail in Chapter 4, excellence in process execution drives results. Do you know the definition of an auditor? They are the people that come in after the battle to kill the wounded. Process-oriented metrics, such as perfect order fulfillment, order cycle time, delivery to customer commit date, package cycle time, upside production flexibility, finished goods inventory turns, and cash-to-cash cycle time drive behaviors; behavior drives results. The great quality guru, Joseph M. Juran, said, “Goal setting has traditionally been based on past performance. This practice has tended to perpetuate the sins of the past.” Focusing on process performance aligned with strategy will keep metrics current and relevant to achieving results.
Using SCOR® metrics as the foundation of your development will accelerate your journey. Why do I constantly refer to SCOR®? It’s an open industry standard, regularly reviewed and validated in the market by practitioners; and, it is user friendly because it is in electronic form and more easily accessed and searched. However, I will also refer you to CSCMP’s Process Standards and APQC’s Process Classification Framework (PCF) as well. All, including SCOR®, are also tied into APQC’s Open Standards Research database for ease in benchmarking which we will discuss in more detail in Chapter 9. Regardless of your choice, using industry standard resources and benchmarks accelerates your transformation development and journey. They are simply hard to dispute; and, it is easier to sell industry standards to senior managers.
The second pillar of the House of Excellence is to develop a balanced scorecard. Robert S. Kaplan and David P. Norton wrote the book The Balanced Scorecard: Translating Strategy into Action. As you develop and organize your metrics, you should develop your scorecard minimally around both internal and external metrics. It is also a great example of how the SCOR® level one metrics align to supply chain performance attributes.
External or customer facing metrics and perspectives will be those measuring the reliability, responsiveness, and agility attributes. Internal business process metrics and perspectives will measure performance in cost and asset management. From Kaplan and Norton’s perspective, we would also want a dimension to track the financial results from our process performance. And, very importantly, we would also want to include a dimension measuring performance objectives for innovation, learning, and growth which are topics to be covered in more detail in Chapter 9.
The third pillar of our House of Excellence is to create a process improvement culture which is self-actualizing and, to a large extent, the objective of this book. But, your culture needs a house to live in. And, as transformation is a journey, you need to decorate and remodel the house with all of the learning you experience along that journey. It is also a communications tool when presenting to your senior management team, associates, and colleagues in other demand management structures, customers, and suppliers. The House of Excellence is your supply chain operating system for driving performance improvement. I include it here as it must be aligned to the business strategy and overall performance objectives of the company as set in the financial operating plan.
Within the conversation of performance measurement, the driving force of self-actualization and a process improvement culture is process orientation and systems thinking. As we discussed in Chapter 4, when you focus on process, you generally take people out of the equation. The people execute the process; but, the metrics are process metrics and not necessarily people metrics. When you focus on process, you also often take the gaming out of the development of the metrics. Process metrics are generally cross-departmental and require collaboration. Process performance metrics should be visible and successes should be celebrated. Bring on the pizza and beer!
Once you have your “house” in order, you should optionally extend your process definition and metrics to include suppliers and customers. As you begin to synchronize and collaborate with customers and suppliers, you will also be mapping your processes to the processes of your customers and suppliers as we discussed in Chapter 6. As you determine responsibilities for managing the process gates and the critical action triggers, you and your partners will also be defining the performance attributes associated with the processes based on the collaboration. You can then identify the process metrics required to successfully execute across those boundaries.
The second option in the House of Excellence is performance-based compensation. On the one hand, I have always been a proponent of performance-based compensation. One of my colleagues at Burroughs, Mike Pajakowski, used to always say, “Money talks, BS walks.” Money, reward power, is always a motivator. One of my colleagues, Dave Simbari, when he was at IMI implemented a compensation plan that included a component that was directly tied to the revenue of the company. Even administrative assistants and the receptionist received a percentage of monthly revenue generated. It certainly focused everyone’s attention on their role in growing revenue. When you called IMI, you received the warmest welcome and most professional handling of your call than anywhere else.
That said, performance-based compensation isn’t for everyone. The criteria for the compensation has to be clearly defined, communicated, and the employee has to have a role in achieving the performance driving the compensation. If you have a union shop, it’s going to be really difficult; but, it will be well defined.
Clearly, the success of your performance management operating system will be driven by your leadership on the transformation journey. Peter Drucker said, “Management is doing things right; leadership is doing the right things.” Taking that quote along with his “you can’t manage what you can’t measure” quote, and your performance management operating system will drive your operations to build a value-based and sustainable House of Excellence that any senior manager will support.
But, while only a part of the process for gaining senior management support, the House of Excellence provides the methodology for attributing supply chain performance to the critical success factors and financial performance of the organization.
Note: Supply Chain Transformation: Practical Roadmap to Best Practice Results, published by Wiley, lists for US $60 hardcover, and is also available as an e-book and on Kindle from booksellers worldwide.
Richard Sherman is Discipline Expert, Supply Chain Management, at Trissential and Director of Strategic Development at the Council of Supply Chain Management Professionals (CSCMP).
Keywords: supply chain management, supply chain management scm, supply chain systems, performance management, supply chain transformation, supply chain quality