Establishing metrics to track supply-chain performance seems, on its face, like a fairly simple and straightforward undertaking. If one is interested only in measuring siloed, functional performance, this perception is true. But most companies today need to understand performance in terms of the overall, inter-enterprise supply chain and be able to tie that overall performance to strategic corporate objectives - a far more complex task.
"I see companies beginning to think of performance measurement as a more critical part of their overall strategy and as a way to help with their top line as well as their bottom line," says Shoshana Cohen, lead partner in the worldwide supply-chain practice of Pittiglio Rabin Todd & McGrath (PRTM), Waltham, Mass. "So the trend we see is to base evaluations of supply-chain effectiveness on these two things. It's an approach that goes beyond tracking inventory turns or on-time delivery."
Breaking out of traditional siloed metrics begins with top-level strategic planning. "Companies need to say, 'OK, what is my strategy here? Given that strategy, what does our supply chain need to excel at doing?' says Cohen. "Maybe it needs to be really fast, or really flexible or really inexpensive. Whatever it is, you need to pick metrics designed to measure that capability."
"I wouldn't say everyone is doing this, but I do think more and more companies are starting to understand that this is a much more effective way of managing their performance," she says. (Cohen and co-author Joseph Roussell detail this approach in their recent book, Strategic Supply Chain Management: The 5 Disciplines for Top Performance, published by McGraw Hill.)
A strategic approach to supply-chain performance also is being driven by the growing use of balanced scorecards at many large companies, says Steve Banker, director of supply-chain services at ARC Advisory, Dedham, Mass. At the beginning of the year these companies establish their most important financial goals as well as goals in other areas. "Many of these top goals have supply-chain components," Banker says. "So if a company wants to improve its cash flow, for example, that may drive a number of key performance indicators (KPIs) for supply-chain managers and line employees, such as speeding order processing and improving order accuracy and fill rates."
Establishing the proper KPIs, and targets for each, is an important next step and one that can be especially difficult when cross-functional or cross-enterprise agreement is required, says Cohen. "When I say shipping really fast, do I mean on time to when people asked for it, on time to when I committed, or any time that is better than my competition? Everyone has to agree on the definitions."
Companies also need to eliminate superfluous measures and stick to those that will drive the desired result. "A lot of people measure everything because they feel safe having a lot of information, but only a limited number of things can be tweaked to get operational improvements," says Paul Hoy, director of manufacturing and industrial marketing at Cognos, Ottawa, a leading provider of scorecards and enterprise performance management solutions. Also, he says, it is important to understand the cultural implications inherent in the choice of metrics. "Everyone says that you can't change what you don't measure, but the corollary is also true - you should only measure what you are willing to change."
Targets for each KPI capture the level of improvement desired. "Targets should be aggressive but achievable," says Cohen. "They are essential because if I tell you that you are operating at X and don't tell you where you need to be, you don't have any way to gauge whether your performance is good or bad." There are many ways to determine targets, from benchmarking to customer feedback, she says. "Then, along with a target, you need a plan to get there. There is no point in setting very aggressive targets and having nothing to back it up, so you must have initiatives that are going to move you toward the goal," she says.
The final step is actual implementation, where a company identifies data sources, starts collecting the data and creates an appropriate format for communicating it, Cohen says. Lastly, but importantly, "you have to have commitment to actually review this information," she says. "There are a lot of metrics being generated out there that no one is looking at."
A number of technology solutions are available that enable companies to gather and monitor data to track performance against KPIs and to take appropriate action. Generally referred to as Supply Chain Performance Management, these applications couple visibility and event monitoring with sophisticated analytic engines that get to the root cause of problems and spot emerging trends. As corrective action is taken and validated, continuous improvement occurs.
|"You should only measure what you are willing to change."|
- Paul Hoy of Cognos
Timely, incisive articles delivered directly to your inbox.