When you're managing more than $500m worth of inventory at 250 locations throughout the U.S. and Mexico, you had better be able to measure the performance of that supply chain on a daily basis. And when the goods actually belong to someone else, the situation becomes even more critical.

That's the challenge confronting xpedx, the largest North American distributor of printing paper, graphic supplies and equipment for publishers, printers and offices. (It is also a big distributor of packaging and janitorial supplies.) Based in Loveland, Ohio, the wholly owned subsidiary of International Paper Co. generates more than $7bn in annual sales as a supplier of product, inventory management and logistics services to more than 80,000 active customers. If its results were broken out from those of the parent company, xpedx (pronounced EX-PE-DEX) would still rank among the Fortune 500.

While many companies are running away from inventory, or at least trying to minimize their exposure to it, xpedx is embracing what can be a severe drag on corporate balance sheets. Frequently the company takes title to goods on behalf of its clients, performing demand planning, purchasing, logistics services, freight management and payment to suppliers. So xpedx has a pressing need to ensure that product running through its network is being handled in the most efficient way possible.

Good metrics are essential, says Michael Ukropina, vice president of operations and supply chain logistics. The trick is figuring out which ones to use. It begins with three or four high-level metrics, then expands into another 15 or 20, all relating to key elements such as financial and productivity measurements. Examples include lines per hour, days inventory on hand and pick accuracy, but the actual metrics employed depend on the customer's unique needs, says Ukropina.

Often the chosen metrics will be customized to address a particular situation or line of business. For example, a retailer opening a new store must have certain products arriving on certain days, with virtually no margin of error allowed. So carriers will be measured down to the hour of delivery, says Jeff Neely, director of sales for xpedx Supply Chain Services. (His unit serves large and mid-sized transport providers, retailers and pharmaceutical companies.)

It's equally important to adopt a set of metrics that measures performance across the supply chain, in real time. xpedx tracks productivity down to the number of picks per hour at all of its facilities, says Neely. It also keeps close tabs on the carriers who are moving goods to consignees, including the 1,300 xpedx trucks that travel throughout the U.S. and Mexico every day.

All of that information is downloaded into a series of reports that are accessible on demand to xpedx's clients. Just because they have outsourced responsibility for inventory management and logistics doesn't mean they don't want to know what's going on in their supply chains. So the xpedx service known as ePortfolio offers more than 30 separate reports, which can be viewed online or downloaded as spreadsheets or other types of documents for analysis. The reports are available in four major categories: inventory management, order management, program performance and shipment items and trends. Built around a proprietary, in-house system, information is drawn from a large-scale database and funneled through a report-writing tool.

Customers get information such as inventory status, alerts, receipts classified by supplier and the location of all product on the floor, on order and committed. They learn of any shipment that was late or short along with back orders, credits and returns, off-cycle ordering and complete purchase histories, among other things. Reports are downloaded each night out of the xpedx mainframe, although some may be issued on a weekly or monthly frequency. Says Guy Belew, xpedx's corporate vice president of marketing: "Our business is entirely dependent on product, service and supply chain excellence-every hour, every day."

The Offshoring Challenge
The globalization of supply chains presents new challenges for companies trying to get a handle on vendor and inventory performance. Sunnyvale, Calif.-based Finisar is a maker of optical transceivers for data networking and telecommunications. Customers include some of the world's largest high-tech companies, including Cisco Systems, Dell Computer and Hewlett-Packard. Recently Finisar followed the example of many other producers and ventured into overseas manufacturing. In a departure from common practice, however, it opted to run its own plants in Malaysia and China, and even made some strategic acquisitions of suppliers. (Finisar also conducts research and development in Singapore, and operates wafer fabrication facilities in Texas and California.) But even with direct control over offshore manufacturing, the company faced big challenges in the area of performance management.

First came the question of selecting just the right metrics. "You don't want too many," says Duane Hardacre, director of supply chain strategy and business systems. "Then you get lost in the weeds."

Finisar had to determine which ones would help to drive top-line growth, allowing it to capture market share while ensuring profitability. "It has to tie back to your balance sheet," says Hardacre. "Otherwise, what's the point of measuring it?"

Key metrics for Finisar include purchasing spend, plan management, and open purchase orders. Below that, it measures elements that are mostly of interest to operational executives, including on-time delivery, inventory value and turns, and manufacturing yield management. In the case of the last, even an increase of one or two percentage points can have a multi-million-dollar impact on the bottom line, Hardacre says.

	"You have to boil down the metrics to the essential ones. You don't change what you don't measure. And you don't measure what you're not going to change." - Paul Hoy of Cognos

Selecting and activating the right metrics is difficult enough. But for Finisar, there was an additional complication. Having struggled in the period following the dotcom bust, the company had limited resources for implementing a performance-management program. It couldn't afford an off-line data warehouse or full-fledged business intelligence tool. Instead, it drew on the capabilities of software already acquired from Oracle Corp., in the form of the enterprise vendor's built-in tool known as Daily Business Intelligence, or DBI. Known today as Oracle B.I., the application gave Finisar a rudimentary view of business metrics, along with "one single source of the truth," according to Hardacre.

There were certain gaps in the software-Finisar couldn't get multiple views of inventory, such as work in progress, raw material and finished goods-but it was enough to create a cohesive, real-time view of key metrics across the organization. And once top management convinced the various corporate functions to embrace the tool, the benefits became obvious. "What took ten man-hours to get certain inventory views now takes me five minutes," says Hardacre.

A new feature from Oracle, called Extensibility, will build out the B.I. tool so that Finisar can customize the model and view metrics across corporate functions. The company will then be able to develop a scorecard that can monitor vendor-managed inventory programs and other supplier activities, Hardacre says. He also expects to make use of Discover, an Oracle application for data mining and ad hoc intelligence. For example, a Finisar manager might want to view the remaining backlog of product due to ship by the end of a quarter, and compare it against the company's current build plan to ensure that the two measures are in harmony.

Having the right software doesn't solve the problem of tracking supply chain performance. Many companies lack good practices for continually measuring operations, says Nadeen Syed, vice president of advance planning products with Redwood City, Calif.-based Oracle. "They're doing it without the right information at the right time at their fingertips," he says. That frustrates the ability to make quick decisions in response to real-world events.

Even when they have outsourced operations to contract manufacturers, companies need a clear view of the shop floor, Syed says. They might use the information to make procurement decisions, especially if they are still buying components that get shipped to the supplier for assembly.

It's not strictly necessary that all relevant data be housed in a single location, such as a centralized data warehouse, Syed says. But the system needs to be good enough to reach out and grab data in real time from multiple sources, both internal and external. The important thing, he says, is to establish a "closed-loop" system that generates critical information, then uses it to drive corporate actions all along the supply chain.

Oracle includes management dashboards in its software, displaying key performance indicators (KPIs) in an easy-to-view format which is tailored to the requirements of each layer of operations. When a problem crops up, managers can drill down to the specific customer and discover the immediate cause. The system triggers alerts when performance falls outside pre-defined parameters for service levels, inventory and the like.

Monitoring the Complexities
Vicor Corp. makes most of its products, consisting of power components and systems for communications, data processing, test equipment, medical and defense electronic markets, within the U.S. Production is at headquarters in Andover, Mass., as well as in Sunnyvale, Calif. All the same, the company has a highly complex supply chain. Turning out some 1.6m top-level units per year, Vicor functions under a high-volume, high-mix production model, suited to mass customization. Bills of materials are up to 11 levels deep. Customers are located all over the world, says Joe Jeffery, director of manufacturing systems.

Vicor's system for establishing performance metrics draws on enterprise resource planning (ERP) software acquired from PeopleSoft Inc. (now part of Oracle). It is a fully integrated tool which covers production planning, order management, general ledger and purchasing. However, due to the complexity of its manufacturing model, Vicor found it necessary to overlay a Web-based system with dashboard and ad hoc reporting capability, Jeffery says.

Those additions were internally developed. At the same time, Vicor deployed business intelligence software from Cognos Inc. The goal was to acquire metrics and analytics capability on top of the ERP system. Cognos BI allows Vicor to arrange business information along formal reporting lines. At the same time, data can be viewed across different time periods, from days to years, and displayed in rolling and comparative time dimensions.

Like Finisar, Vicor was driven in part by the high-tech market slump following the Sept. 11, 2001 terrorist attacks. Prior to that, says Jeffery, the industry as a whole was "fat, dumb and happy. After that, things got really tough." Vicor's gross margins sank to levels below profitability. The need to get a grip on supply chain performance was greater than ever before.

Teams from various functional areas came up with annual "themes" to drive improvement across the organization. For example, a "4-50" campaign targeted a 50-percent improvement in four key metrics. Another year, Vicor sought to take $10 of cost out of every modular power supply it produced. And in 2006, the "Always Affordable" campaign seeks to dispel the company's image as a maker of only high-priced "boutique" products.

So far, the focus on metrics has paid off. From early 2002 to the same period of 2006, Vicor raised its gross margins from 24 percent to 46 percent. And it did it on lower sales volume.

Jeffery believes the company can do better. It is considering upgrading to the integrated suite of applications known as Cognos 8. That would give Vicor a better system of alerts tied to key metrics, allowing it to use certain leading indicators, such as delinquent backlogs, to predict glitches further down the chain. It would also gain the capability for managing metadata (data used to describe and define other data, helping the company to understand information stored in a data warehouse, for example).

Paul Hoy, director of manufacturing solutions for Burlington, Mass.-based Cognos, says the popularity of offshore and outsourced manufacturing "has made it harder for companies to get their arms around the extended supply chain and be responsive to change." Companies are struggling to achieve a holistic view of their global operations, and tighter control over supply chain performance can help.

It all starts with the determination of a company's ultimate goals, says Hoy. What does it seek to achieve in the market? How does it intend to position itself against competitors? How can its supply chain contribute to success?

"You have to boil down the metrics to the essential ones," says Hoy. "You don't change what you don't measure. And you don't measure what you're not going to change." Most companies limit themselves to half a dozen key metrics at the highest level of management, focusing on such elements as customer satisfaction, price performance and use of contract carriers and freight lanes.

Certain terms must be defined up front, says Hoy. Does "customer satisfaction" mean an avoidance of stockouts? Or products flowing to market on a just-in-time basis? Or is it the quest for the "perfect order"-shipping the right product, at the right time, damage free? The answers will vary from company to company.

Once the metrics are set in stone, they can be displayed both through dashboards and vendor scorecards. The first offers a graphical snapshot of how the company is doing at any given moment, fed by information from multiple disciplines. The second measures actual performance against targets and shows vendor quality over a period of time. The same data can be used to populate both tools, says Hoy, although metadata capabilities are often needed to settle on definitions that will be understand by all supply chain managers.

Starting From Scratch
How can a company know what its performance levels should be in the first place? According to Jim Tompkins, chief executive officer of Raleigh, N.C.-based Tompkins Associates Inc., it begins with understanding industry best practices, and benchmarking against them. His firm maintains a large database of best practices, based on extensive surveys of leading U.S. retailers and manufacturers. Companies can draw from that tool to develop their own metrics and create effective dashboards for monitoring ongoing performance.

Tompkins' benchmarking capabilities were boosted with the May 2005 acquisition of The Soleus Group, a private consultant with expertise in supply chain benchmarking and execution. The two firms had previously collaborated in overseeing a best-practices advisory board, consisting of six leading consumer products companies. The board spearheaded a series of Web-based interviews which resulted in the database on which companies can draw for creating dashboards and assessing their own performance.

Metrics filter down through an organization according to the needs of each level of management. Senior supply chain executives are likely to start with just three measures, Tompkins says: transportation cost as a percentage of revenue, distribution cost per line or order, and inventory turns. When any of those elements goes array, managers must then be able to drill down to the precise cause, whether it's a poorly laid-out network of distribution centers, wrong mode or carrier for the job, inadequate software, or countless other possibilities.

Metrics fall short when they aren't accompanied by a methodology for addressing problems that are highlighted by the dashboard, Tompkins says. Another mistake is relying on composite or average numbers that don't reveal the underlying problem. For example, a single metric for inventory turns won't necessarily show whether a company has too much dead or slow-moving inventory on hand. "One number masks a lot of mistakes and problems," says Tompkins.

Any successful performance-management program will account for the ways in which metrics affect each other, says Neeraj Gokhale, general manager for collaborative information with Palo Alto, Calif.-based Tibco Software Inc. For example, a retailer or supplier can reduce stockouts by boosting inventory. But that will send inventory levels into the red. Companies must understand the trade-offs among cost, inventory and service levels, Gokhale says.

Secondly, he says, it's essential to treat information with the same level of attention as physical product in the supply chain. In fact, a smoothly functioning supply chain will allow for the dissemination of data before the goods get to market, allowing for suppliers to fix problems before they have an impact on customer service.

Data on supply chain performance must be synchronized so that all partners in the chain are speaking the same language. "The demand forecast may be [based] on net weight," says Gokhale, "but you may be populating [the supply chain] on gross weight. So you still end up with stockouts." One of Tibco's software applications, known as Collaborative Information Manager, synchronizes master data across the chain to avoid such problems. The vendor also offers tools to ensure that information is flowing throughout the supply chain on a real-time basis.

Centralizing the Data
Jerry Hill is director of supply chain solutions marketing with Teradata, a division of NCR Corp. with headquarters in Dayton, Ohio. He argues for establishment of a neutral, centralized data warehouse as the starting point for tracking performance management. The tool can house internal data as well as that from multiple tiers of suppliers and customers.

Hill warns against the aggregation of data as it travels up the corporate ladder. Managers tend to report averages and eliminate the outlying results. "When you're done, the management team has an impression based on an average of averages," he says. "Internal reporting indicates that everything's fine, but a particular customer may be extremely dissatisfied by your performance."

To avoid that trap, companies should report all performance results, especially those that fall outside the norm. "They're the indicators of where the problems lie," says Hill.

Choosing the right metrics, he adds, is a matter of asking the right questions about the nature of your business. Certain leading indicators can go a long way toward painting a picture of the working supply chain. For example, a provider of aftermarket parts might want to track its referral rate- the number of times it had to satisfy a dealer with inventory from a non-facing distribution center. Or it might ask when consumption of product is not matching the forecast, a situation where corrective action is required immediately.

Similar factors come into play when dealing with carriers, especially where global supply chains are concerned. Greg Johnsen, executive vice president of marketing with Alameda, Calif.-based GT Nexus, says companies need a software-driven platform where they can monitor and manage carrier service levels at all times. GT Nexus got its start as a service for tracking ocean transport, where long transit times make it essential that shippers know the status of their goods. It subsequently added capability for air and surface transportation.

By having all major carriers reporting on one system, a shipper can observe long-term patterns of service, Johnsen notes. It might realize, for example, that one or two suppliers are accounting for 80 percent of additional freight costs because they're routinely missing ship windows. The shipper can respond by shifting its supply base, or placing the errant suppliers on a strict compliance program.

Scorecards, an essential component of supply chain performance management, can track more than just everyday operating metrics. Companies can use them to derive more value from their suppliers, says Chris Sawchuk, procurement leader with the Atlanta-based Hackett Group. His firm tracks the use of so-called balanced scorecards, both for operational and financial purposes, using the data to advise on best practices and performance benchmarking.

Companies today are asking suppliers to do more than furnish product, Sawchuk says. They are relying on those vendors for new product ideas and other ways to improve revenues. New metrics can track the extent to which key suppliers play the role of business partners, and collaborate with their customers in a more meaningful way.

The important thing, Sawchuk says, is that companies are actually able to improve supply chain performance through the use of carefully selected metrics and easy-to-use dashboards. "Measurement doesn't mean anything unless it drives action," he says.