At the root of the problem is the lack of a basic set of measurements and accompanying standards. At a universal level there are the generic goals of profitability and customer service. But how are these high-level goals translated to supply chain practices? What elements of the supply chain should be monitored, and how?
The academic approach is to develop strategic models, the most common of which are customer intimacy, product innovation and least cost. Each of these models then developed a demand and supply set of practices and measurements that reinforced the goal of the strategic model. The models also developed customer relationship management (CRM) and supplier relationship management (SRM) to reinforce the goals of the model. But the theory remained at a generic level.
At the same time, companies focus on meeting customer demand, expressed as on-time performance, and minimizing costs, through reducing material and product costs and inventory. Meeting customer demand was easy to set as an overriding goal; the issue was determining at what level of performance that metric should be set.
Minimizing costs, on the other hand, covered a lot more initiatives, including supplier relationships, demand forecast accuracy, inventory control, material movement and storage. Here, the issues were how the initiative should be measured, and what the appropriate goal should be. Benchmarking is an obvious answer, but companies seldom share their results with national competitors, and hardly ever with those on an international scale.
Theoretically, colleges teach what should be measured and how, while companies focus on the elements of production that lead to a maximization of service delivery and cost reduction. There are no specific industry standard processes, and no common goals.
An example that illustrates this conundrum is inventory control. Usually, the measurement taught in schools and used by companies is inventory turnover ratio (TOR). But there’s no uniform definition of how to measure this goal, and even more worrisome, there’s less uniformity on how to achieve TOR reduction. Both the “what” and the “how” vary widely from company to company, and aren’t consistent with what is taught. Finally, there are no industry standards on what constitutes effective inventory control.
We need a standard against which operating parameters should be measured, as well as agreement on how the measurement should be made and what represents a competitive goal. This should be determined by industry type. The standard should also provide suggested best practices for achieving this goal.
Blair Williams is a C.Eng., CSCP -F, CPIM- F, CLTD with APICS.
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