SCM METRICS -Presentation 1 BY K.SASHI RAO MANAGEMENT CONSULTANT.
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Transcript of SCM METRICS -Presentation 1 BY K.SASHI RAO MANAGEMENT CONSULTANT.
SCM METRICS-Presentation 1
BYK.SASHI RAO
MANAGEMENT CONSULTANT
Presentation 1-Coverage
Brief Introduction to SC/SCM Performance Management and its
Importance for SCM Performance Measurement Models - SCOR - Balanced Score Card
K.Sashi Rao/2011
What is Supply Chain?(1)
Supply Chain is a network of organizational
departments/functions involved thro’ upstream and
downstream linkages, in the different processes and
activities that produce value in the form of products
and services in the hands of the ultimate customer.
K.Sashi Rao/2011
What is Supply Chain?(2)
Supply Chain is a network of facilities and distribution
options that performs the function of procurement of
materials, transformation of these materials into
intermediate and finished products and the distribution of
these finished products to customers. Supply chains exist
in both service and manufacturing organizations, although
the complexity of the chain may vary greatly from industry
to industry and firm to firm.
K.Sashi Rao/2011
What is Supply Chain Management?(1)
Supply Chain Management (SCM) is the network of organizations and systems that are involved through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer
K.Sashi Rao/2011
What is Supply Chain Management ?(2)
• SCM is the process of planning, implementing
and controlling the operations of the supply chain
with a purpose to satisfy customers requirements
as efficiently as possible. SCM spans all
movement and storage of raw materials, work-in-
progress and finished goods from point-of-origin to
point-of-consumption.
( Keith Oliver, Booz Allen Hamilton,1982)
K.Sashi Rao/2011
• SCM means transforming a company’s supply chain into an optimally efficient customer satisfying process, where the effectiveness of the whole supply chain is more important than effectiveness of each individual department.(IMANTS BUBA, Belgium)
• A continuously evolving management philosophy that seeks to unify the business functions within the enterprise and allied business partners along with the entire supply chain into a highly competitive and total supply system focused on synchronizing the flow of value added products, services and expectations.(B.K. Kalyanramankumar)
K.Sashi Rao/2011
Performance Management-Strategic objectives
Profits-absolute and growth Sales- absolute and growth Market share-absolute and growth Supply chain performance Customer satisfaction Product quality and service Product development- time to market
K.Sashi Rao/2011
Performance Management
Competitive environment calls for speedy, cost efficient and reliable supply chain
Supply Chains have a huge leverage on creation of customer value
Today’s competition is ‘supply chain versus supply chain’
What gets measured, gets improved
K.Sashi Rao/2011
Performance Management
• All businesses need performance management
• Supply chains constitutes costs to organizations
• Measurement, control, review and corrective methods needed
• Cost-effectiveness and performance effectiveness are vital
• Strength and performance only as good as weakest link
• Performance measures needed specific to firm( to enable
improvements) and to industry/competitors ( to enable
benchmarking)
K.Sashi Rao/2011
Performance Measurement
MEASUREMENT is the key to performance management since:
If you cannot measure something, you cannot control it
If you cannot control something, you cannot manage it
If you cannot manage something, you cannot improve it
K.Sashi Rao/2011
Performance Management
Traditionally, performance management has been developed as a basis for monitoring and controlling an organization
But these have been primarily based on financial ratios like ROI, EPS and RI
While these are value based , they are lagging indicators, and do not provide help for planning future investments nor provide clues for performance improvement
They solely concentrate on minimizing costs and increasing labor efficiency but neglecting operational performance measures like quality, on time and full delivery amongst others
K.Sashi Rao/2011
Performance Issues
• Supply chain constitutes costs to organizations
• Cost-effectiveness and performance effectiveness
• Strength and performance only as good as weakest
link
• Performance measures needed specific to firm( to
enable improvements) and to industry/competitors ( to
enable benchmarking)K.Sashi Rao/2011
Performance vis-à-vis Competition
SCM competitiveness is derived from success
levels/criteria in:
Product/Quality Competitiveness
Price/Value Competitiveness
Time/Delivery/Responsiveness Competitiveness
Key is to see what customers expect, how your
competition is doing and what do we need to do to bridge
and exceed that gap
K.Sashi Rao/2011
Performance Measures-overall (SCOR basis)
Cost –internal facing
Assets Utilization- internal facing
Reliability – customer facing
Flexibility – customer facing
SCOR=Supply Chain Operations Reference basis (Supply
Chain Council)
K.Sashi Rao/2011
Performance Measures-Financial
Raw material and other acquisition costs• Facilities investment costs• Direct and indirect manufacturing costs• Direct and indirect distribution costs• Inventory holding costs• Transport costs- inbound and outbound• Activity based costs like material handling, assembling, outsourcing etc• Costs due to customer returns/ rejects/ replacements• Ratio of net sales to assets employed
K.Sashi Rao/2011
Performance Measures-Non-Financial Measures
•Customer satisfaction levels, periodic customer surveys• Conformances to agreed performance (quality specs, quantity,schedule etc) • Inventory level (days of sale)• Cash to cash cycle time (days of receivable and days of inventory less days of outstanding payables)• Lead times- production, procurement.• Cycle times- production, procurement, customer order fulfillment.
K.Sashi Rao/2011
Performance Measures-Logistics
Freight costs per unit weight/unit volume Warehousing costs per unit of throughput Logistical packaging costs per unit
product/volume/weight Labor cost per product/weight /volume Logistics assets utilization Logistics productivity performance Logistics cycle time performance Reverse logistics related costs/returns/damaged
stocks
All such costs to be finally measured as percent of sales and per unit volume and per unit weight
K.Sashi Rao/2011
Performance Measures -Inventory
Inventory turnover ratio (TO)(%) =Total investment in inventory/Annual sales x100
Inventory turns (TN) (number)=Annual sales/Total investment in inventory
Total inventory days (TID) ( number)=Total investment in inventory/Annual Sales x 365
Days of sales outstanding (DSO) ( number)=Accounts receivable/Annual sales x 365
Days of payable outstanding (DPO) (number)= Accounts payable/Value of raw materials consumed x 365
Cash to cash cycle (CCD) (days)= TID+DSO-DPO RM inventory (days)= Raw material inventory/Value of raw
materials consumed x 365 WIP inventory (days)=WIP inventory/Value of production x 365 FG inventory( days)= FG inventory/Annual sales x 365
K.Sashi Rao/2011
SCM Performance Benefits-to Customers
• Quicker response to demands• Better products/services• Competitive pricing of products/services• Faster supplies reducing inventories
• ALL LEADING TO CUSTOMER DELIGHT
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SCM Performance Benefits- to Suppliers • More business growth
• Reduced operational costs• Faster communication for timely decisions• Improved business –partner relationships• Organizational effectiveness and efficiency
•ALL LEADING TO BOTTOM LINE GROWTH
K.Sashi Rao/2011
Measurement Approaches
Supply Chain Council’s Supply Chain
Operations Reference (SCOR) Process
Reference Model – examining cost, assets,
reliability and flexibility metrics
Balance Scorecard- assessment based on
financial, customer, internal business &
learning/growth perspectives
K.Sashi Rao/2011
Process Reference Model This contains: Standard descriptions of management processes A framework of relationships among the standard
processes Standard metrics to measure process performance Management practices that produce best-in- class
performance Standard alignment to features and functionality Once captured as a standard process reference
model can be: Implemented purposefully to achieve competitive
advantage Described unambiguously and communicated Measured, managed and controlled Tuned and re-tuned to a specific purpose
K.Sashi Rao/2011
SCM Process Reference Model Draws from best in business process
reengineering, benchmarking and best practices analysis as applied to SCM
Captures the “as –is” state of SCM processes and derives the desired “to-be” future state
Quantify the operational performance of similar companies and establish internal targets based on “best in class results”
Characterize the management practices and software solutions that result in “best in class “ performance”
K.Sashi Rao/2011
SCOR Model- 5 Core Management Processes
K.Sashi Rao/2011
SCOR Model- 5 Core Management Processes
Plan- processes that balance aggregate demand and supply to develop a course of action which best meets sourcing, production and delivery requirements
Source – processes that procure goods and services to meet planned or actual demand
Make – processes that transform product to a finished state to meet planned and actual demand
Deliver – processes that provide finished goods and services to meet actual and planned demand, typically including order management, transportation management and distribution management
Return – processes associated with returning or receiving returned products for any reasons, which extends to post delivery customer support
K.Sashi Rao/2011
K.Sashi Rao/2011
SCOR MODEL-Methodology(1)
Level 1: Analyse Basis of Competition Level 2: Configure Supply-Chain Level 3: Align Performance Levels,
Practices and Systems Level 4: Implement Supply-Chain
Processes and Systems
K.Sashi Rao/2011
K.Sashi Rao/2011
SCOR MODEL-Methodology(2)
Phase 1- develop a SCOR card listing competitors and collection of competitive performance measures data
Phase 2- detailed analysis of material flows to identify improvement scope to close competitive gap
Phase 3-mapping material flows along with work and information flows to understand processes and activities
K.Sashi Rao/2011
SCOR Model Measures-internal facing(1)
Cost Total logistics cost Value added productivity Warranty cost Assets Cash to cash cycle time Inventory days of supply Asset turns
K.Sashi Rao/2011
SCOR Model Measures-internal facing(2)
Total logistics cost- contribution of logistics cost to total revenue as % age
Value added productivity- is calculated by the division of the difference between revenue and material cost by total employment
Warranty cost- as a % age of total revenue Cash-to-cash cycle time- time taken from cash
spent on materials to cash generated as revenue
K.Sashi Rao/2011
SCOR Model Measures-internal facing(3)
Inventory days - how fast inventory is produced and then sold to customers. Inventory turns is the ratio of total annual sales to average inventory
Asset Turns - division of revenue by total assets
K.Sashi Rao/2011
SCOR Model Measures-external facing(1)
Reliability Delivery performance Order fulfillment performance-fill rate,
fulfillment lead time Perfect order fulfillment Flexibility Supply chain responsiveness Production flexibility
K.Sashi Rao/2011
SCOR Model Measures-external facing(2) Delivery performance- defined as the %age of
ship-from-stock orders shipped within 24hrs. On time delivery is defined as the proportion of orders delivered on or before the date requested by customer
Order fulfillment- Lead times measure the meantime from the date of order is placed to the date the customer receives the shipment
Perfect order fulfillment-is reached with the right product delivered to the right place at the right time, for customer satisfaction
K.Sashi Rao/2011
SCOR Model Measures-external facing(3)
Supply chain responsiveness- as the ability of the complete supply chain to react according to the changes in the marketplace
Production flexibility- number of days needed to absorb an unplanned lasting 20% growth in demand
K.Sashi Rao/2011
Typical SCOR Model Results(1)(Source: www.supply-chain.org)
SCOR Measures
Unit ofMeasurement
MedianClass
Best in Class
Delivery performance
Percentage 81% 96%
Upside performance flexibility
Number of days
42.0 8.3
Cash to cash cycle
Number of days
66.6 24.7K.Sashi Rao/2011
Typical SCOR Model Results(2)(Source: www.supply-chain.org)
Supply Chain Cost/Industry
Unit of measurement
MedianClass
Best inClass
Consumer packaged goods
SCM cost % to Revenue
11.2 5.3
Chemical and Pharmaceuticals
SCM cost % to Revenue
9.8 4.0
Telecom Equipment
SCM cost % to Revenue
8.5 3.3
Defense and industrial
SCM cost % to Revenue
10.2 4.5
Computers andElectronics
SCM cost % to Revenue
9.1 4.0
K.Sashi Rao/2011
SCOR Model-Benefits
It aligns improvement efforts with the supply chain , and not the organization
It provides a comprehensive analysis of the supply chain focusing on the customer as the end –point
It enables selection of SCM improvement projects which will have maximum impact on the firm’s strategic objectives
K.Sashi Rao/2011
SCOR Model-limitations
Does not cover : Sales and marketing development R& D Product development Elements of post-delivery customer support
Does not address: Training Quality Information technology Administration
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Balanced Score Card
It is a concept for measuring whether the company is meeting its objectives in terms of its vision and strategy
This is done using 4 perspectives-financial, customer, internal business processes and learning and growth
Suggested performance indicators within each perspective follow
K.Sashi Rao/2011
Balance Score Card-Performance Indicators Financial- ROI, cash flow, financial result, return on
capital employed and return on equity Customer- delivery performance by date and quantity,
customer satisfaction and customer retention Internal processes- number of activities, opportunity
success rate, accident ratios and defect rates Learning and growth- investment rate, illness rate,
internal promotions %, employee turnover and gender/racial ratios
Since these above measures can be many and will vary from to firm, the key is to strike a ‘balance’ amongst all of them to truly reflect and measure what are the particular firm’s Key Success Factors or Key Performance Indicators
K.Sashi Rao/2011
What then is a BSC?
A performance measurement system A strategic management system A change management tool A communication tool
It is ALL or ANY of these and depends on how an individual firm wants to use it as a single comprehensive system/tool or along with other existing systems/tools
K.Sashi Rao/2011
Why implement BSC?
To increase focus on strategy and results To improve organizational performance by
measuring performance that matters To align organizational strategy with day
to day work of its employees To focus on drivers of future performance To communicate the vision and strategy to
all its key stakeholders To prioritize projects/initiatives with
maximum impact
K.Sashi Rao/2011
BSC as a measurement systemBSC as a measurement system
FinancialTo succeed financiallyhow should we appear
to our shareholders ?
Customer Relations
To achieve our vision how should we appear
to our customers?
Learning, Innovation and
GrowthTo achieve our vision
how will we sustain our ability to change and improve ?
Internal Service Process
To satisfy our shareholdersand our customers that
what business processes we must excel
VISION AND STRATEGY
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BSC as a strategic BSC as a strategic management systemmanagement system
Translates strategy into: Objectives Measures Targets Initiatives Each of the 4 perspectives will need
these above attributes
K.Sashi Rao/2011
BSC triangle
Desired state
Differentiating activities
What must be done
well to implement
strategies
How strategic
success is
measured
Mission
Vision
Strategy/Goals
ObjectivesIn each perspective
MeasuresIn each perspective
K.Sashi Rao/2011
Financial PerspectiveFinancial Perspective
What financial steps are necessary to ensure the execution of our strategy/goals?
Are the program’s/ department’s goals, implementation, and execution contributing to the bottom line?
Are we meeting operational and financial targets?
Dimensions of Quality: Efficiency
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Customer Relations Customer Relations PerspectivePerspective
Who are our target customers? How do our customers see us? How do customers rate our
performance? Dimension of Quality:
Accessibility Acceptability Continuity
K.Sashi Rao/2011
Internal Service Process Internal Service Process PerspectivePerspective What critical processes must we excel at to
satisfy our customers/stakeholders? What must be done internally to meet
customer expectations? Dimension of Quality:
Effectiveness Appropriateness Consistency Reliability
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Learning, Innovation and Learning, Innovation and Growth PerspectiveGrowth Perspective
How can we continue to improve? What capabilities and tools do our
employees need to execute our strategy/goals?
Dimension of Quality: Competence Participation Involvement and commitment
K.Sashi Rao/2011
When does BSC succeed? Obtained top management sponsorship and commitment Involved a large base of leaders, managers and
employees Worked thro’ the established vision and strategy Agreed on the terminology and metrics to be monitored Designed BSC model to suit the firm’s needs Have a dedicated and determined project/program
champion View the BSC as a long term journey and not a short term
project Planned for and managed change Have an interactive two-way communication process Applied a disciplined implementation framework Get outside help especially in the initial design stages to
give it an outside/objective perspective
K.Sashi Rao/2011
When does BSC fail? Ill defined strategy Lack of integration of all the 4 perspectives Conceptual confusion and lack of clarity on metrics chosen
and their performance mechanisms Not involving all stakeholders Top-down management style which excludes employees being
an essential part of the implementation Centralized measures which will not be accepted by people
down the line Data collection/analysis of performance a difficult and painful
process Not aligning the BSC with other operational processes and
systems Failure to evolve and change the BSC as and when strategies
change over time
K.Sashi Rao/2011