KPIs: Improving Supply Chain Performance Management

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KPIs Improving Supply Chain Performance
Management
Northeast Supply Chain Conference and
ExpositionFramingham, MA September 19 21, 2004
Tim Dolan, C.P.M. Manager, New Product
Support Global Procurement Organization The
Gillette Company
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Agenda

• The Gillette Company Overview
• Key Performance Indicators What Are They?
• The Case for Measuring Indirect KPIs
• Developing Indirect KPIs
• Sample KPI Scorecard
• Guidelines and Benefits

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Gillette History

• Founded in 1901 by King C. Gillette
• Boston, Massachusetts

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World-Class Brands, Products, People

• 9 Billion in Sales (2003)
• Multinational Corporation
• Gillette - Recognized Brand Worldwide
• 32 Manufacturing Centers
• 15 Countries
• 200 Markets
• Approximately 29,000 employees worldwide
• 4 primary Business Units
• Grooming
• Blades Razors
• Personal Care
• Batteries
• Oral Care
• Appliances
• Innovative 47 of Sales from Products less than
  5 years old

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Gillette Products
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What are Key Performance Indicators (KPIs)?
Price
Delivery
Quality
Performance to schedule
Total product cost
Product reliability and consistency
KPIs are measurements of a supplier or service
providers performance in key activity areas
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KPIs have historically been used to measure
direct material suppliers performance
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History of Indirect KPIs
Jim KiltsCircle of Doom

• Centralize procurement
• Implement Strategic Sourcing (SSI)

SupplyChain
TradePractices
KPIs sustain strategic sourcing savings
FinancialPractices
Source Jim Kilts Is An Old-School Curmudgeon,
Fortune, December 30, 2002
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What is Indirect Spend?

• Computer/Telecom
• Energy/Utilities
• Printing/Marketing/Advertising
• Employee Benefits
• Office Products
• MRO

• Travel
• Facilities
• Professional Services
• Fleet
• Logistics
• Capital Equipment

Indirect spend is the sum of expenditures for
goods or services that are not components of the
end product or service delivered to a customer
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The average indirect spend for Fortune 500-size
companies is 50 of total spend
Consumer Products
Aerospace, Defense, DoD and DoE Contracting
Utilities/Engineering Construction
( Millions)
Source CAPS Critical Issues Report, September
2003
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Spend for services accounts for more than half of
a companys indirect spend
Purchase Spend as a Percentage of Total Purchase
Spend Median spend 434M
Total
Marketing
IT
Pro Services
IndirectGoods21
Construction/Eng
Services33
Inventory
Manufacturing
Direct Material51
Other Accounting FacilitiesLegal Logistics Real
Estate Temp Labor Travel
Source Defining and Determining the Services
Spend in Todays Services Economy, CAPS, July
2003
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Participants in a recent CAPS survey expect
indirect spend for services to increase
Indirect Spend - Services ( Millions)
5-yr CAGR 5
Source Services Purchases Not Your Typical
Grind, Inside Supply Management, September
2003 Note Chart represents respondents median
spend
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Developing KPIs for Indirect Suppliers
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Evaluation criteria for indirect suppliers can be
grouped into three categories
Definitions of Supplier Criteria

• How well does the supplier continue to enhance
  the product/service, process or cost?

• How well does the supplier deliver on the terms,
  conditions and prices agreed to in the contract?

• How well does a supplier satisfy our customers
  from a product or service quality perspective?

• How cost competitive is the supplier from an
  industry perspective and from a historical
  perspective?

Ultimate objective is to be able to quantifiably
measure and compare individual suppliers
performance
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Specific KPIs can be tailored to meet the needs
of various suppliers
Attributes
Objective and subjective attributes are necessary
for measuring indirect suppliers
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Indirect KPIs can use a 1 to 5 scale to score
KPIs and a weighting system which allows some
flexibility, but keeps weights significant and
relatively consistent

• Indirect Supplier Evaluation Criteria

Standard Scores

• 5 Superior far exceeds expectations
• 4 Exceeds expectations
• 3 Meet expectations
• 2 Does not meet expectations
• 1 Needs improvement significantly does not
  meet expectations

Allowing flexibility with category weighting
ensures that the KPI scorecard is tailored to
meet the unique needs of the measured supplier
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• Contract Compliance

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Contract Compliance Attributes

• Actual costs versus budget
• Service level results
• On time delivery
• Return rate
• Order and billing accuracy
• Average lead-time

Contract compliance attributes mirror the
suppliers contractual commitments
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Customer Satisfaction
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While KPIs measured with objective data are the
most reliable, it can be argued that they do not
capture the entire picture in regards to supplier
performance

• Traditional KPI constraints
• Difficult to evaluate the interactions of
  supplier personnel with customers
• Quality can only be measured in regards to damage
  or breakdown, and is difficult to measure for
  services
• Strong traditional supplier KPI data does not
  necessarily indicate whether or not the customer
  is satisfied

Customer Satisfaction Surveys provide mechanism
to help evaluate supplier performance
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Customer Satisfaction Surveys capture the
customers opinions in regards to supplier
performance.

• Supplier Interaction Infrequent ___
  Moderate____High ____
• Questions
• I feel the supplier provides high quality goods
  and services.
• I feel the supplier provides high value for the
  cost.
• I would recommend this supplier to others.
• When I have questions, this supplier responds in
  a timely manner.
• If there is an issue, this supplier resolves the
  issue in a timely manner.
• If there is an issue, this supplier resolves the
  issue to my satisfaction.
• In my opinion, this supplier deserves recognition
  as a top supplier.
• Scale
• 1 Strongly Disagree
• 2 Disagree
• 3 Neutral
• 4 Agree
• 5 Strongly Agree

Customer satisfaction surveys can be a primary
determinant of customer satisfaction
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A comprehensive supplier measurement system can
mitigate customer satisfaction survey limitations

• Customer satisfaction tends to be overwhelmed by
  bad experience, even if the bad experience was
  not the suppliers fault
• Most recent experience is recalled not overall
  supplier performance
• Surveys tend to be subjective
• A single negative response can skew results
• Response rate tends to be low

Issues
Mitigating Techniques

• Evaluate responses in relation to other KPI data.
  Conduct enough surveys to mitigate this effect
• Adjust weighting for Customer Satisfaction Survey
  where commodity has a great deal of objective
  data
• Utilize statistically significant sample size and
  possibly discard highest and lowest scores
• Target key customers with vested interest and
  explain significance of KPI

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Cost Competitiveness and Continuous Improvement
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Benchmarking establishes cost competitiveness

• Supplier vs industry
• Supplier vs other benchmark
• Standard or target prices
• Should cost prices
• Price paid indices
• Consumer Price Index (CPI)
• Ecommerce capability

Comparing supplier pricing against benchmarks
assists in avoiding price creep
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Cost Competitiveness and Continuous Improvement
Guidelines

• In addition to KPIs that measure cost versus
  competition and industry standards, continuous
  improvement, supplier process improvements and/or
  cost saving targets can be established
• Define baseline spend that generates the savings
  target

• Cost Saving Guidelines
• 5 Superior far exceeds
  expectations 6 or more
• 4 Exceeds expectations 4 6
• 3 Meet expectations 2 4
• 2 Does not meet expectations 0 2
• 1 Significantly does not meet
  expectations 0

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Collecting the Data
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Evaluate the costs/benefits of each data
collection method available
Data collection is the most difficult and
time-consuming activity in the KPI process.
However, it is integral to a successful KPI
program.
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A wide range of sources can provide measurement
data
Data Warehouse
ERP Systems
Supplier-provided reports
Third-party data
Industry benchmarks
Customer Satisfaction Surveys
Attaching the data and documentation to the
scorecard validates scoring and makes it possible
for the supplier to take corrective action
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The KPI Scorecard
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Sample Scorecard - Temp Labor KPIs
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An overall score is calculated and used to
measure indirect suppliers performance

• Indirect Supplier Evaluation Criteria

Weight X Score Indirect Supplier KPI Score

• Weight 40
• Score 3.5

• Weight 30
• Score 4

• Weight 30
• Score 4.3

Indirect Supplier KPI Score
EXAMPLE
3.89
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Guidelines for developing KPIs
KPI Guidelines

• Determine criteria for identifying which
  suppliers will be measured by KPIs
• What gets measured, gets done. Be clear on what
  youre measuring and why.
• Develop jointly with suppliers to achieve buy-in
• Align KPIs with your goals and objectives
• Develop KPIs that are objective and measurable
• Limit KPIs to a manageable number
• Communicate results to suppliers and management
  on a timely basis
• Complete the process and follow-up on results and
  corrective actions

Business Benefits

• Generates supplier improvements that benefit you
• Justifies suppliers inclusion in your supply
  base
• Identifies need to re-source supplier
• Strengthens and improves supplier relationships
• Develops suppliers
• Rewards for performance

KPIs drive continuous improvement and cost savings
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Questions