Supply Chain Metrics

This is a series on Supply Chain Basics looking at the discipline from the Society of Operations Management perspective. Supply chain is also essential to project management as PMs are typically trained in world class contracting. For example, my Masters program had several courses involving contracting and the Defense Acquisition Workforce Improvement Act, DAWIA, certification highlights the combination of project management and supply chain. In this post, we will explore supply chain measurement methods adding some additional support as well.

Supply Chain Metrics

Metrics are key to assessing supply chain performance. One of the keys to using metrics is not to focus too much on the analysis or numbers. When this occurs, the phenomenon is known as analysis paralysis  and should be consciously avoided.  While there is no guarantee of achieving an optimal metric value, metrics do give the organization a goal or objective. Relative to that goal or objective is a performance measurement. The organization must first identify the objective then select meaningful metrics in support of that objective. APICs chooses to use Key Performance Indicators, KPIs, that are tied to strategic objectives. There are two approaches:

1. The Balanced Scorecard - designed to measure multiple dimensions in addition to the financial. 
2. SCOR Based model - designed by the SCC.

KPI Review

APICS points to a number of attributes that are intricately part of a strategy that is expanded into objectives and subject to being assessed by measurement. Useful KPIs cannot focus on silos and must cross all aspects of the supply chain activity under observation and associate with other supply chain traits. Briefly the traits include: Velocity, Visibility, Variability, Collaboration, Trust, Customer Focus, Flexibility Security or Risk, Compliance, Environmental, Elemental Profitability,  Financial Impact or costs.   KPIs may also measure supply chain effects such as the Bull Whip Effect. Overall, a KPI must be tied to the corporate or supply chain strategy and has trade offs with other aspects of the supply chain.

The Balanced ScoreCard

Introduced in 1992, the balanced score card was designed to give managers a comprehensive over view of the business performance and has been adapted to supply chain use. The balanced score card increases the focus to 4 dimensions of measurement than a single dimension which has been financial or return on investment, ROI, prior to the score card.  The four dimensions are:

1. Customer. The customer view of the business has value for current and future business. 


2. Business Process. This perspective focuses on effectiveness and efficiencies within the operation or supply chain. 


3. Innovation and learning. The perspective hones in on the organizations or supply chains ability to identify, assess, select, and take the actions necessary to resolve supply chain issues.


4. Financial. This focuses on traditional financial, after the fact, performance. Still important but limited in its scope of predictability.

Developing a meaningful and impact driven score card requires careful preparation, leadership, and follow-through. Key traits include; communication, unity of effort from top to bottom, and schedules that assign responsibilities. Management needs to be visibly behind the initiative.

The SCOR Based Approach

SCOR defines five main supply chain processes; plan, source, make, deliver, and return from which metrics are derived. APICS focuses on level 1 metrics which are high level despite the approach going much deeper. Level 1 metrics tend to cross over multiple processes. The advantages are:

Cross-functional and cross-company supply chain metrics. It includes formulas to calculate numerical values for each attribute for world class performance. SCOR approach was developed and refined by dozens of major firms and applied to many initiatives.

High performance supply chain. The SCOR based approach considers performance attributes in support of high performance. 

Reliability: This metric relates to perfect fulfillment's. Loss rates, return rates. However, the only level 1 measure is perfect order fulfillment.

Responsiveness: This metric is a measure of latency in the supply chain or the amount of time it takes to complete a delivery. The only level 1 measure is order fulfillment cycle time.

Agility: This is a measure of capacity and capability within the supply chain to respond to unusual orders and quantities. Flexibility, adaptability, and risk are attributes that lend to agility. Some of the metrics include:

• Upside supply chain flexibility is the number of days required to achieve a 20% increase in quantities delivered. 
• Upside supply chain adaptability is defined as the amount production increase that can be sustained for 30 days. 
• Downside supply chain adaptability is the reduction in quantities ordered that van be sustained for 30 days without inventory or cost penalties. 
• The overall value at risk, VAR, is the sum of the supply chain values at risk, VARs, for Plan + Source + Make + Deliver + Return.

Costs: (2 metrics) This is a measure of indirect and direct operating expenses for the supply chain to function. Ie supply chain management costs and cost of goods sold.

Asset Management: The effectiveness of the supply chain and organization to support demand satisfaction. This includes fixed assets and working capital. Utilizations of cash and returns on investments.

• Cash-to-cash cycle time is the time it takes for an investment to flow back into the company after it has been spent on raw materials.
• Return on supply chain fixed assets is the measure of return an organization receives on its invested capital for supply chain fixed assets in all five supply chain processes. 
• Return on working capital is the magnitude of an investment relative to a company’s working capital position versus revenue generated from a supply chain. This includes accounts payable, inventory, supply chain, costs of goods sold, and supply chain management costs.

SCOR model and Risk Management

The SCOR risk model is associated with 4 of the 5 SCOR processes. Return is not considered in the risk assessment. The risk management effort results in:  Faster implementations, more comprehensive identification of potential risks, better application of SCRM best practices, abd better SCRM coordination with customers, suppliers, and stakeholders

Comment: Most of industry and companies think they are unique or different in some way that differentiates them from the rest of the market. Rarely is this the case but to a greater extent many companies choose to step-out-of-the-box and break the mold in order to create profit opportunities. While APICS has its own cookie cutter approaches and methods to managing the supply chain, there are other practices may be leveraged as well in order to break that mold. For example, effects based outcomes closely follows the score card approach but breaks out of the mold allowing for more than 4 dimensions while connecting strategy to tasks.

Managing a supply chain is a juggling act and metrics are typically used as a barometer of performance. The supply chain manager must gauge performance and twist the rheostat up or down in the various aspects of the supply chain. Once the chain is designed, the supply chain manager should have a dashboard that is scanned routinely in a high velocity chain. 

Reference:

(2011). APICS Certified Supply Chain Professional Learning System. (2011 ed.). Version 2.2.