Performance

SCMPerformance Measurement

Dr. Bonivasius Prasetya,S.Si, M.EngMagister Teknik Industri Universitas Mercu Buana

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Role of Performance Measurement

When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates.

- Thomas Monson

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Measurement Creates Understanding

Performance measurement systems provide insight into the nature and workings of value-added processes.

A well defined performance measurement system provides feedback regarding:

1. Customer requirements2. Company and supplier capabilities3. Probable success of collaborative initiatives

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Measurement Drives Behavior Measurement is more critical than

communication, training, or perhaps anything else when it comes to managing human behavior.

Measurement’s influence on behavior is pervasive because people pay attention to how they are measured.

Managers must adopt measures that truly promote collaborative behavior.

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Measurement Leads to Results Measurement is a prerequisite for high level

execution and attainment of world-class results.

Well-designed measurement systems must provide accurate and relevant information in a timely manner.

Incorrect measurement systems lead to non-aligned strategies, poor understanding, and inconsistent if not counterproductive behavior.

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Traditional Measurement

Areas that are essential to measure to accomplish customer service and profitability goals:

1. Asset Management2. Cost3. Customer Service4. Productivity5. Quality

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Measures of Asset ManagementSourcing Operations Logistics

Raw material inventory levels

Raw material inventory turns

Inventory obsolescence

Return on Assets Economic value

added

Work in process inventory

Inventory obsolescence

Return on Assets Return of

Investment Economic value

added

Inventory turns Inventory

obsolescence Return on Assets Inventory days

supply Economic value

added

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Measures of CostSourcing Operations Logistics

Unit priceAcquisition costTotal cost of

ownershipCost as a percent of

salesAdministrative

Direct labor costs Manufacturing

overhead Costs per unit Inventory carrying

cost Warranty costs

Inventory carrying cost

Total landed cost

Outbound freight

Warehousing labor costs

Administrative

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Measures of Customer ServiceSourcing Operations Logistics

On-time deliveryOrder to delivery

cyclePercent shipments

expeditedResponse time to

inquiry

Production to due date

Manufacturing cycle time

Backorders New product lead

time Customer

complaints

Fill Rate On-time

delivery Order cycle time Complete orders Customer

complaints

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Measures of ProductivitySourcing Operations Logistics

Purchase orders per employee

Dollar spend per employee

Commodity teams per employee

Percent transactions automated

Labor productivity Equipment

downtime Changeover time Engineering

change orders Total factor Productivity

Units shipped per employee

Equipment downtime

Order productivity

Warehouse labor productivity

Transportation labor productivity

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Measures of QualitySourcing Operations Logistics

Shipments rejectedDefect rate—parts

per millionPercent suppliers

certifiedPercent orders from

certified suppliersResponse to inquiry

Defect rate—parts per million

Percent rework or scrap

Statistical process control

Total hours quality training per year

Percent employees six sigma trained

Damage frequency

Order entry accuracy

Picking/shipping accuracy

Document/invoicing accuracy

Number of customer returns

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Traditional Measurement - Caveats Traditional measurement systems are not

holistic, they are designed to capture and communicate primarily functional information.

Traditional measures are primarily oriented to short-term financial results and cost-cutting.

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Contemporary Supply Chain Measures

Measurements consistent with supply chain management core principles emphasize:

Goal alignment Customer satisfaction Process integration Total costs Inter-organizational collaboration

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SC Measures – Customer Satisfaction

Traditional customer service measurements often do not provide a clear understanding of customer expectation or satisfaction levels.

Internal service measures do not identify what the customer values or their perception of the value they receive.

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Customer Satisfaction MetricsTraditional Practice

Internal service measures over satisfaction measures

Measures that are expressed as averages

Measures that treat all customers the same

Best-In Class Practice External assessment that reveals what customers really think

is important Absolute measure expressed in customer centric terms Measures that recognize unique needs of individual

customers

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SC Measures – Total Cost Total costing is a prerequisite to good process design

and management

Total cost is the sum of all the costs incurred in planning, designing, sourcing, making, and delivering a product from raw material to the final customer.

Managers lacking accurate total cost information make decisions that favor their own company’s financial performance when making trade-offs within the supply chain.

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Total Supply Chain CostTotal supply chain costs are the sum of all costs incurred in planning, designing, sourcing, making, and delivering a product from raw materials to the final customer.

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SC Measures – Activity Based Costing

Activity based costing links costs directly to the activities that drive them.

ABC costing requires process transparency and detailed information on products, customers, activities, and resource costs.

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Activity-Based Costing

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Supply Chain Performance Measures

Superior supply chain performance moves beyond simple functional excellence.

New measures are required to facilitate collaboration throughout the entire supply chain.

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Characteristics of Effective Measures Aligned with organizational

goals Aligned with project goals Customer oriented Meaningful to workers,

managers, & customers Consistent across appropriate

functions or departments Promotes cooperative behavior

both horizontally & vertically Communicated to all relevant

individuals Simple, straightforward, &

understandable

Easy to collect the needed data Easy to calculate Available on a timely basis—

real time when possible Strategic and tactical Quantifiable Designed to drive appropriate

behavior Designed to drive learning &

continuous improvement Designed to provide information

that is actually used in decision-making

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Supply Chain Performance MeasuresSC Inventory Days of Supply

Total number of days of inventory required to support the supply chain—from raw materials to the final customer acquisition. Expressed as calendar days of supply based on recent actual daily cost of sales

Supply-Chain Response Time

The theoretical number of days required to recognize a major shift in market demand and increase production by 20 percent

Total Supply Chain Cost

The sum of all the costs incurred in planning, designing, sourcing, making, and delivering a product broken down for each member of the supply chain

Cash-to-Cash Cycle Time

The time required to convert a dollar spent to acquire raw materials into a dollar collected for finished product. (Total Inventory Days of Supply + Days Sales Outstanding – Days Payables Outstanding).

Perfect Order Fulfillment

A perfect order is an order that is delivered complete, on time, in perfect condition, and with accurate and complete documentation. Fulfillment is the percent of orders that are perfect (Perfect orders/Total orders).

Inventory Dwell Time

The ratio of days inventory sits idle to days inventory is being productively used or positioned

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Supply Chain Performance MeasuresSource/Make Cycle Time

The cumulative time to build a shippable product from scratch—if you start with no inventory on hand or on order. Consists of total sourcing lead time, release-to-start build, total build cycle time, and complete build-to-ship time

Customer Inquiry Response Time

The average elapsed time between receipt of a customer call and connection with the appropriate company representative

Customer Inquiry Resolution Time

The average elapsed time required to completely resolve a customer inquiry

Order Fulfillment Cycle Time

The average actual lead times consistently achieved, in calendar days, from customer order to customer delivery. Includes, order authorization to entry, entry to release, release to shippable, shippable to customer receipt, and receipt to customer acceptance

On-Shelf In-Stock Percentage

The percentage of time that a product is available on the shelf, rack, or wherever the customer expects to find and buy it. Measures the supply chain’s ultimate ability to satisfy the end customer

Value-Added Productivity

Total company revenues generated less the value of externally sourced materials expressed as a ratio of total company headcount

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Supply Chain Performance Measures

Measures of supply chain performance: Supply chain inventory days supply Supply chain response time Total supply chain costs

These measures allow for identification of inefficiencies throughout the entire supply chain.

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SC Measures - Scorecards Process encompasses objectives, measures,

targets, and action plans.

Typical scorecard emphasizes cost, quality, delivery, responsiveness, and innovation.

Provide mechanism for evaluation and communication of performance along critical dimensions.

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SC Measures - Scorecards

1. Help companies select and monitor both suppliers and customers

2. Support recognition programs3. Benchmark leading-edge practices4. Disseminate best practices throughout the

supply chain5. Identify deficiencies that can be overcome

through continuous improvement efforts

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Supplier Scorecard

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Benchmarking The formal process of comparing the attributes

of one organization to those of another. Process consists of:

1. Define attribute to be benchmarked and identified a best in class comparison company.

2. Document the best in class process at strategic and operational levels. Compare with current practice specifying any and all differences.

3. Develop a strategy, complete with specific methods, for adopting best practices.

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Benchmarking - Types Competitive Benchmarking – evaluating best

practices of leading competitors within industry.

Noncompetitive Benchmarking – evaluating best practices regardless of industry.

Internal Benchmarking - large global firms may find opportunities to disseminate best practices within the organization.

Magister Manajemen Industri Universitas Mercu Buana

Supply Chain Measurements or Supply Chain Metrics

Inventory Turns, Cycle Time, DPMO and Fill Rate are used to track Supply Chain performance.

Metrics can help SC manager to understand how the company is operating over a given period of time

Supply Chain Measurements can cover many areas including Procurement, Production, Distribution, Warehousing, Inventory, Transportation, Customer Service - any area of logistics


A Few Things To Keep in Mind

1. Tracking your Metrics allows you to view your performance over time and guides you on how to optimize your Supply Chain. It allows management to identify problem areas. It also allows for comparison to other companies through like industry benchmarking

2. Certain metrics, such as Cycle Time, have a widely accepted definition. Other metrics, such as Backorders, may need to be customized for your particular industry or logistics business model


A Few Things To Keep in Mind

3. Measurements alone are not the solution to your weak areas! The solution lies in the corrective actions that you take to improve the measure. The solution comes from process or system improvements

4. Measurements should have owners....people or departments that are responsible for achieving a target on the metric. Supply Chain Management needs to encourage and support the process changes to achieve the desired targets


7 Basic Steps

1. Identify the metrics that you want to use. Don’t use metric available. Focus on the vital measurements (mean the most to business)

2. Understand the meaning of these metrics. 3. Learn the mechanics behind the measurements. What drives

them...positive & negative. Try to understand the various factors that influence your results

4. Using this information, identify weakness or areas of improvement in your current processes


7 Basic Steps

5. Set goals based on these improvement areas. The goals should be aggressive, but yet obtainable

6. Put corrective action in place to improve your processes. Make sure all effected areas have a clear understanding of the changes

7. Monitor your results. Did your corrective actions yield your desired results? If so, what is your next area for improvement? If you did not get the desired results, what went wrong?


Backorder Backorder: An unfilled customer order. A backorder is demand (immediate or

past due) against an item whose current stock level is insufficient to satisfy demand. This calculation can vary. Some companies count items that are not confirmed (not allocated) and past the Requested Delivery Date (or Requested Ship Date). Other companies may also count those items with stock confirmed, but past due.

Backorders may be expressed in "pieces", or in "value". Backorder calculations are often tracked at a variety of levels. Example: Customer, Division, Total Company

Aged Backorder: Reports on backorders in past-due time buckets based on the Requested Delivery Date/Requested Ship Date


SCM Balanced Scorecard Tracks a limited number of key metrics. These metrics should be closely aligned to the

companies strategic objectives. The measurements usually cover 4 areas:

1. Financial - Example: The cost of manufacturing, warehousing, transportation etc. 2. Customer - Example: Order Fill Rate, Backorder Levels, On Time Delivery 3. Internal Business - Example: Adherence-To-Plan, Forecast Error 4. Training: Example: In house Training Hours, APICS Membership/ Certification.

The central idea is to focus on key metrics that have real meaning to your company. You don't want to get lost in a sea of numbers that don't really mean anything.

The Balance Scorecard approach helps you to keep your measures aligned with your objectives. These measures should be tracked over time (usually monthly) with specific targets for each.


Cycle Time Measurement Customer Order Promised Cycle Time: The anticipated or agreed upon cycle time of a

Purchase Order. It is gap between the Purchase Order Creation Date and the Requested Delivery Date.This tells you the cycle time that you should expect (NOT the actual)

Customer Order Actual Cycle Time: The average time it takes to actually fill a customers purchase order. This measure can be viewed on an Order or an Order Line level.The measure starts when the customers order is sent/received/entered. It is measured along its various steps of the order cycle. Through credit checks, pricing, warehouse picking and shipping. The measure ends at either the time of shipment or at the time of delivery to the customer (sometimes tracked by using an EDI #214). This "actual" cycle time should be compared to the "promised" cycle time.


Cycle Time Measurement Manufacturing Cycle Time:

Measured from the Firm Planned Order until the final production is reported. It usually takes into account the original planned production quantity versus the actual production quantity. Example: X% of the planned quantity must be completed on a production run or the cycle time should not be considered.

Purchase Order Cycle Time:Measured from the creation of the PO to the receipt at your location (Distribution Center, Hub etc). One of the keys here is not not have your RDD (Requested Delivery Date) exceed the agreed to lead time. If it does, it may artificially inflate your Lead Time. Additionally, any in-between points available will add value to the metric. Example: Creation of the PO, Shipment from the Vendor, Receipt at the DC. This will tell you the manufacturing time vs the transit time.


Transportation Metrics Freight cost per unit shipped:

Calculated by dividing total freight costs by number of units shipped per period. Useful in businesses where units of measure are standard (e.g., pounds). Can also be calculated by mode (barge, rail,ocean, truckload, less-than-truckload, small package, air freight, intermodal, etc.).

Outbound freight costs as percentage of net sales: Calculated by dividing outbound freight costs by net sales. Most accounting systems can separate "freight in" and "freight out." Percentage can vary with sales mix, but is an excellent indicator of the transportation financial performance.


Transportation Metrics Inbound freight costs as percentage of purchases.

Calculated by dividing inbound freight costs by purchase dollars. It is important to understand the underlying detail. The measurement can vary widely, depending on whether raw materials are purchased on a delivered, prepaid, or collect basis

Transit time: Measured by the number of days (or hours) from the time a shipment leaves your facility to the time it arrives at the customer's location. Often measured against a standard transit time quoted by the carrier for each traffic lane. Unless you are integrated into your customers' systems, you will have to rely on freight carriers to report their own performance. This is often an important component of leadtime. Transit times can vary substantially, based on freight mode and carrier systems.


Setting Goals for Supply Chain Metrics Focus on a limited number of measurements that add value. Choose those

metrics that will track your companies true performance. You don't want to get into the trap of "analysis paralysis". Over-analysis leads to confusion and sometimes conflicting goals. 5 - 7 key measures per functional area (referred to as KPI's:Key Performance Indicators)

Set the goals. This will enable your organization to track it's performance to expectations. But how do you set these goals? How do you determine what to target? At what point have you achieved Supply Chain optimization? Your overall company goals should be considered when setting your Supply Chain targets. Supply Chain goals do not conflict with the company objective.


Some Guidelines.....

First, make sure you understand exactly what it is your measuring. What drives this measure? What causes failure? Where do you need improvement? Once you can answer these questions, you're in a better position to set your goals.

Some companies use a guideline of 10% improvement per year. But, this is a very general guideline


Benchmarking One way to set your goals is Benchmarking. There are various

benchmarking services, that for a fee, will compare your company to other "like" companies. You submit your answers to a set of questions. Those answers are averaged in with other companies submissions. Averages are calculated and World Class levels are set.

As an example, if the average Fill Rate for your industry is 93% and your performing at a 80% level, then it's obvious you need to set an aggressive goal. However, if the industry average is 93% and you're at 94%, you may want to target a minimal gain. Your aggressive efforts should probably be focused in other areas. The caveat here is defining "like" industries. Make sure the comparison your making is a fair one.


SMART Goals Specific: Provide enough detail so that there is no question on what is being measured and

no question how the metric is calculated. You should be specific as to the measurement, goals and responsible people/department.

Measurable: Here is where you use your metric. Make sure you have a reliable system in place that will accurately measure your performance

Attainable: Will the Supply Chain projects you have scheduled for the year produce results that will achieve your goal? The person setting the goal and the person responsible for achieving the goal should agree with the target. If results are un-attainable or unrealistic, they will have a de-motivating effect on your employees.

Realistic: Don't plan to do things if you are unlikely to follow through. Better to plan only a few things and be successful rather than many things and be unsuccessful. Your Supply Chain goals should be challenging, but realistic in relation to the improvement projects you have in place.

Time frame: Identify when your targeting to hit your goal. Example: Your current Fill Rate is 87% and your Supply Chain projects should improve your measure to 93%. But is the 93% goal for the final month of the year OR is it averaged out over a specific timeframe?


Customer Service Policy Additionally, make sure that your Supply Chain goals are aligned with

your Customer Service Policy.Example: Your agreement to your customer might be a 95% Fill Rate, with an Order Cycle Time of 10 days. Make sure that your goals reflect these customer agreements.

Supply Chain optimization is difficult to achieve. But with the right metrics in place and proper goals set, you now know where to focus your improvement projects. You have just gotten closer to Supply Chain optimization.

Performance

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