Developing An Overview of Supply Chain Performance Metrics

1
Developing An Overview of Supply Chain
Performance Metrics
Process, Recommendations
McKinsey October 2003
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This document gives an overview of the different
metrics that can be used to measure supply chain
performance

• The Supply Chain CoEs objective is to define a
  benchmarking framework capable of
• Comparing generic metric performances for use on
  projects.
• Capturing further benchmarking data in a
  consistent format.
• The London Shops task
• Develop an overview of the different metrics to
  measure supply chain performance.
• Select the most important metrics that can be
  used across industries.
• Discuss how the most important metrics link other
  operational metrics within each stage of the
  supply chain.
• Suggest how the supply chain CoE should continue
  concerning this topic.

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We used information from several sources during
our project

• Internal and external documents
• High level benchmarking framework for supply
  chain performance (H .Cook)
• Shop Study (March 1997) accessing information
  from available experts and past projects.
• Supply chain benchmarks and best practice (Dow
  Polyurethane Epoxy April 1995).
• Supply Chain Benchmark Assessment (March 1997).
• Supply chain appraisal and benchmarks (client X
  September 1997).
• Discussions with supply chain CoE
• Graham Colclough.
• Andrew Morgan.
• Lee Sherman.
• Deborah Huff (Cap McKinsey).

4
Possible data sources

• CIPS (UK) Purchasing ( Supply Chain).
• APICS (US) Supply Chain.
• CAPS (US) Purchasing Supply Chain (US
  Legal)
• Research Benchmark Industry Listings
  (http//www.capsresearch//htm).
• NAPM (US) Purchasing.
• Kaiser Associates Benchmark Specialist
  Consultant.
• US University Research New global initiative
  (investigating entry opportunitiesBob Ackerman).

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Performance measurement is an important but
complex subject
Companies see the need for metrics. . .
. . . but developing the right set of metrics
is a challenge

• If you cant measure, you cant manage, you
  cant motivate
• Establishing the proper measures within an
  organisation enhances continuous

• No commonly used model.
• Business issues that warrant performance
  measurement
• Differ between industries.
• Differ within industry.
• Change overtime.

There is no one right answer
This documents an initial step in the right
direction.
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We used a generic supply chain framework as a
basis for our analysis . . .
Supply Chain Framework
Information Flow
Customer Service
Forecasting Production Planning
Manufacturing
InboundLogistics
Marketing Sales
OutboundLogistics
Purchasing
Maintenance
Integrated Supply Chain Management
Inventory Management
This framework aligns with the CoE POV and is
also similar to framework for the supply chain
diagnostics inventory database.
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. . . and concluded there are three strategic
objectives we should focus on when analysing the
supply chain
Supply Chain Framework

• NB Boundaries
• NPDI
• Support functions

Tailor to company specific (BSC) objectives
Key metrics must give information on how a
company is performing against old strategic
objectives.
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We began with a brainstorming session on the key
drivers for quality, time and cost

• We looked at the supply chain from the customers
  perspective.
• We brainstormed on what could go wrong along the
  supply chain
• What are drivers of performance from a quality,
  time and cost point of view.

Quality
Time
Cost
Price
Service
Product quality
Product quantity
Product delivery
Late arrival
Late delivery
Inventory cost
Product cost
Produc-tion cost
Delivery cost
Customer service cost
The complete picture can be found in the appendix.
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Making their client specific warrants attention

• Respect all sources of data
• Understand their relationshipsthe causal
  tree
• Recognised Cross-Industry In-Industry and
  In-Company similarities and differences.

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Making their client specific warrants attention
(cont.)

• Recognise Cross-Industry In-Industry and
  In-Company similarities and differences.
• Interface the solution to the current clients
  measures, systems, processes and culture
• . . . and guide migration over time.

Ensure accountability for collecting and
actioning is clear.
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Proposed Supply Chain KPIs
Total Supply Chain
Accuracy (as of sales)
Customer satisfaction
of products delivered according to customer
order (quantity/quality)
of customers satisfied with service
of products ordered already in stock
Defect rate of products as of production
of goods delivered according to order
(quantity/quality) by supplier
of active suppliers that account for 90 of
total purchase value
Quality
of satisfied customers
Total cycle time
Time from order placement to reception of goods
Time from production order to delivery into
finished product warehouse
BEWARE of inter-relationships
Time (for customer) from placing order to
receiving goods
Downtime as of total production time
of goods delivered on time by supplier
Time
of products delivered on time
Total supply chain cost as of sales
Cost as of sales
Cost as of sales
Cost as of sales
Cost as of sales
Cost
Cost per product sold as of sales
Number of stock turns/years
KPIs help to identify where the performance
problem is within the supply chain, and steer
towards areas to explore why.
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Each stage of the supply chain has a variety of
metrics to monitor operational effectiveness

• Actual vs. forecasted sales
• of data which can be used without modification
  in the planning process

• of all active suppliers that account for 90 of
  total purchase value
• of correct orders placed
• of alternative sources of supply
• of suppliers involved in product
  development/innovation
• of suppliers per purchasing employee
  (purchasing professional)
• of vendors products ordered
• Purchasing head count as of total head count

• of goods delivered according to order
  (quantify/quality) by supplier
• of carrier alliances
• of overshipments
• of direct material purchases that are not
  inspected at incoming quality assurance, going
  from stock to dock
• of direct material purchases that are not
  inspected at incoming quality assurance, going
  from stock to production
• of orders delivered without unplanned
  communication or special attention

• Defect rate of products as of production
• Scrap rate as of production
• of changes per production period
• of goods repackaged
• Actual vs. production capacity

• Nos of strategies, or uptime service-based
  contracts

• Time from order placement to reception of goods

• Time from production order to deliver into
  finished product warehouse

• of accounts payable handled before due date
• of accounts payable handed in 130 days
• of accounts payable handled in 3160 days
• of accounts payable handled in 6190 days
• of accounts payable handled in over 90 days
• of suppliers connected via EDI
• Average actual time to developed/negotiate a
  contract

• of goods delivered on time by supplier
• Proportion of suppliers who deliver daily
• Proportion of suppliers who deliver frequently
  than monthly
• Proportion of suppliers who deliver monthly
• Proportion of suppliers who deliver twice weekly
• Response time to schedule changes
• Response time to unforeseen problems
• Turnaround time on rejected items

• Average production leadtime
• Current manufacturing leadtime
• Minimum production leadtime

• Downtime as of total production time
• Downtime due to parts shortage (or stock outs in
  general)
• Hours of unplanned downtime

• Cost as of sales

• Cost as of sales
• Cost as of total costs
• Cost of orders purchased (range
• Cost of vendor transactions (range)
• Cost of expedite repair materials
• Purchasing spend per supplier
• Purchasing spend per purchasing employee
  (purchasing professional)

• Cost as of sales
• Cost as of total sales

• Cost as of sales
• Cost per saleable unit
• Cost per unit produced

• Cost as of sales
• Cost per unit produced

These metrics help identify why there is a
performance problem.
Source H. Cook
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In addition to the KPIs each stage of the supply
chain has a variety of metrics to monitor
operational effectiveness (cont.)

• of products ordered already in stock
• Defect rate of products as of products leaving
  warehouse
• Accuracy of inventory records
• Inventory vs. service level
• Items in inventory as of total unit purchases
• Obsolete vs. active inventory

• of correct orders taken
• of additional sales from customer referrals
• of order changes as of orders filled
• of orders handled with commitment to
  product/service delivery on first call

• of customers satisfied with service
•  of complaints as of total orders
• of phone calls to customer service development
  per order shipped
• of complaints due to On-time delivery Order
  Entry Packaging Product quality Shipping Error
• of complaints as of total orders
• of customer contacts per order
•  of enquiries (including complaints) that were
  not answered to the customers satisfaction
• of information requests as of customer orders
• of calls abandoned, answered by recording,
  delayed
• of customer contact through customer service
• of customer follow-up handled by Customer
  Service Representative Department Manager Field
  Representative Responsible Manager
• of invoices containing errors
• of orders delivered complete and without error
  (order fill rate)
• of orders that are damaged on arrival at
  customer site
• of respondents that can handle complaints
  without handing off to other person/dept.
• Average of disputed invoices

• of products delivered according to customer
  order (quantity/quality)
• Degree of utilisation of facilities ()
• Equipment utilisationload
• Equipment utilisationweight

• Customer satisfaction (rating)
• of satisfied customers
• of information on credit history limit
  available On-line
• of information on open-order history available
  On-line
• of information on outstanding balance available
  On-line
• of information on pricing available On-line
• of information on product history available
  On-line
• of information on product ID code available
  On-line
• of information on shipping points available
  On-line
• Ratio of operations labour as of passive labour

Quality

• Average of orders rejected

• Delivery time
• of products delivered early
• of deliveries per manhour
• of orders delivered on time (as defined by
  customer)
• of orders delivered with an average delay of 1
  month
• Average of days delay after scheduled ship date

• Total cycle time
• Time (for customers) from placing order to
  receiving goods
• of products delivered on time
• Average customer quoted leadtime
• Average leadtime from receipt of order to
  shipment
• Average time taken to access information
• Cash to cash cycle
• Longest customer quoted leadtime
• New product introduction time
• Product changeover time
• Shortest customer quoted time
• Time from receipt of order to receipt of
  shipment by customer
• Time taken to rectify incorrect or damaged orders

• Average product time in warehouse
• No. of days consumption in stock (A-goods)
• No. of days consumption in stock (B-goods)
• No. of days consumption in stock (C-goods)
• No. of days safety stock (A-goods)
• No. of days safety stock (B-goods)
• No. of days safety stock (C-goods)
• No. of products with duplication stock
• Planned days of inventory on hand

• Time from order placement to start of delivery

• of accounts receivable settled before due date
• of accounts receivable settled in 130 days
• of accounts receivable settled in 3160 days
• of accounts receivable settled in 91 days
• of accounts receivable settled in6190 days

• Average time taken to respond to requests

Time

• Cost as of sales
• of stock turns/year
• Cost as of cost of goods purchased
• Carried worth of expired lots
• A-goods as a percent of inventory
• Average stock level
• B-goods as a percent of inventory
• C-goods as a percent of inventory
• Inventory cost as of total assets (gross
  assets)
• Maximum stock level
• Minimum stock level

• Cost as of sales

• Cost as of sales
• Cost per delivery
• of route miles per delivery
• of warehousing facilities
• of warehousing of locations
• of transportation units owned by company
• Cost per order
• Cost per route

• Total supply chain cost as of sales
• Cost per product sold as of sales
• of profit from base purchase
• of profit from increased purchases
• of profit from premium pricing
• of revenue generated by largest customer group
  (top 20)
• Cost per product sold as of sales
• Operating profit per customer as of operating
  costs per customer
• Total cost per order
• Total cost per unit produced

• Cost as of sales

Cost
Source H. Cook
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Given the multitude of metrics we suggest to
analyse supply chain performance using a
hierarchy of measures
Type of Measure
Highest Level Use
Example
Who Uses It
Objective

• Forecasting accuracy (as of sales)

• Integrated supply chain
• Generic benchmarking

• Consultant
• Top management
• Supply chain stage manager

• Find where the problem is within the supply
  chain

Key KPI

• of suppliers connected via EDI

• Supply chain stage diagnostic

• Consultant
• Supply chain stage manager

• Identify the why within the supply chain stage

Supporting Metrics

• A-goods as a of inventory

• Supply chain stage diagnostic

• Supply chain stage manager

• Give more in-depth information about supply chain
  stage

Other Operational Measures
. . . digging through the causal tree to improve
business performance.
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For example, the quality of customer service
performance can be clearly measured at three
different levels
Key KPIs
Suggested Supporting Metrics
Other Operational Measures

• of customers satisfied with service

• of complaints as of total orders

• of phone calls to customer service department
  per order shipped
• of complaints due to order entry, packaging,
  shipping error, . . .)
• of calls abandoned, answered by recording,
  delayed, . . .
• of complaints handled by customer service
  rep., department manager, . . .

• of complaints that were not answered to
  customer satisfaction

• Average number of orders rejected

• KPIs will be measured for generic benchmarks,
  whilst operational metrics will be measured by a
  customer service manager.
• . . .

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Outbound logistics performance . . .
Key KPIs
Suggested Supporting Metrics
Other Operational Measures

• of products delivered according to customer
  order (quantity/quality)

• (These can often be driven by customer service
  metrics)

• Degree of utilisation of facilities ()
• Equipment utilisation (load/weight)

• Average number of days of delay after scheduled
  ship date

• Delivery time
• of orders delivered on time (as defined by
  customer)

• of deliveries/man hour
• of orders delivered early
• of orders delivered with an average delay of 1
  month

• Cost as of sales

• of route miles per delivery
• of warehousing facilities/locations
• of transportation units owned by company

• Cost per delivery
• Cost per order
• Cost per route

• . . .

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For maintenance, commonly used supply chain
performance metrics relate to time and cost
Key KPIs
Suggested Supporting Metrics
Other Operational Measures

• Number of service contract
• Number of training days for maintenance staff

• Downtime as of total production time

• Downtime due to parts shortage (or stock outs in
  general)
• Hours of unplanned downtime

• Cost as of sales
• Cost per unit produced

• The quality of maintenance is commonly measured
  by lag measures in terms of cost or as a
  production measure (downtime).
• We suggest the use of two lead measures that
  proactively monitor maintenance performance.
• . . .

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Just remember . . .

• A large number of metrics exist, so be selective.
• A step by step approach to measuring supply chain
  performance should be undertaken in order to
  avoid being overwhelmed by data.
• The following segmentation gives us such an
  approach
• 23 key KPIs allow us to identify where the
  problems exist within the supply chain.
• Key supporting metrics then allow us to answer
  why the problems exist.
• Operational metrics allow us to go analyse the
  supply chain stage in more detail.
• The right set of metrics does not exist for a
  given industry or even a specific company.
• The right set of metrics is dynamic like the
  business it measures and will change with the
  type of industry/problem and over time.
• . . .

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Next Steps for the Supply Chain CoE

• Agree on how you will go forward after this
  project.
• Agree on objectives, scope and accountabilities.
• Eg. Discuss if each GMT needs its own supply
  chain metrics.
• Further populate the supply chain benchmarking
  framework.
• See example for Purchasing.
• Championing (S. Beck/Disc. Heads).
• . . . and roll-out.
• Continuous improvement process.

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Appendix

• KPI Definitions.
• Causal Trees
• Quality
• Time
• Cost

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Purchasing Data KPIs Benchmarks
a CAPS Research Chemical Purchasing Benchmark
1997 H. Cook shop research.
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Service
Product Delivery
Price
Product Quantity
Product Quality
Wrong Info.
Higher Prices Than Competitors
Higher Margin Than Competitors
Wrong Order Information
Unable to Meet Customer Demand
Badly Set Customer Expectations
Delivered Faulty Goods
Produced Faulty Goods
Products Damaged After Mfg
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Definitions for the Supply Chain KPIs

• Forecasting
• Accuracy (as of sales).
• Purchasing
• active suppliers for 90 spend.
• Time from order placement to receipt.
• of goods delivered on time.
• Cost as sales.
• Inbound Logistics
• of good delivered according to order
  (quantity/quality) by supplier.
• Time from order placement to reception of goods.
• of goods delivered on time by supplier.

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Back Up Panels
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Drivers and KPIs are however linked throughout
the supply chain

• They form a causal tree along the supply chain
  which varies between industries and over time
• They do not simply drive and explain just
  quality, time or cost, they may drive or explain
  all three
• We have simplified the tree in this presentation
• We have left out the links and kept the model on
  a generic level

We have not developed a perfect model
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These operational metrics should be used with care

• Ideally they should support key KPIs by
  explaining why performance is meeting/below
  expectations.
• They should also give an in-depth picture into
  how well each supply chain stage is performing.
• However, their use calls for judgement
• They vary across companies and industries (which
  explains the large quantity of metrics
  available).
• Many are not directly linked to key KPIs but are
  useful secondary indicators of performance.
• They do not necessarily link to performance at
  just one stage in the supply chain (but
  accountability must be assigned to someone within
  one stage).
• For example inaccurate order making could lead
  to more time being spent on puchasing, suppliers
  delivering the wrong goods and/or suppliers
  delivering the goods late.