Chain of Thought

If You Don't Measure, You Can't Measure Up

If it's true that you can't manage what you don't measure, there are plenty of supply chain managers who aren't living up to their titles. According to a Next Generation Manufacturing study, fewer than half of companies at or near world class in supply chain management (45%) have a high-level measurement regimen. That's defined as “regular monitoring and review of company-specific metrics by CEO and senior staff. Among those furthest from world class, only 17% have such standards for measurement.

Surprisingly, of those claiming to be in the world class category and don't have a high-level measurement regimen, 11.5% of them don't have any measurement system at all to track supply chain effectiveness. Non-measurers represent almost a third of those furthest from world class (31.6%).

So while supply chain management and collaboration is ranked as highly important or near highly important (4 or 5 on a scale of 1-5) to 68% of companies, according to the Next Generation Manufacturing study, collecting supply chain metrics doesn't get much commitment, even from those who consider themselves world class.

It would be interesting to follow the progress of these non-measuring companies as we enter 2011. It would be even more interesting if a company like Dun and Bradstreet tracked how many of the companies that go bankrupt actually kept supply chain metrics. D&B keeps tabs on about 27 million active United States-based businesses in its global database. It came out with a report recently on firms that filed for bankruptcy. I guess such a report might be useful for companies that don't measure the effectiveness of their supply chains. D&B says the purpose of its report is to help business owners “make better-informed and confident decisions in the face of the myriad risks and uncertainty in today's challenging economic environment—decisions that will have an impact now and into the foreseeable future.”

According to D&B, although business bankruptcies are still growing, it's happening at a slower pace compared to a year ago. In fact, business failures have actually registered a decline in the 12 months ending in June 2010 compared to 12 months ending in June 2009. However, the failure rates of companies in transportation, construction and manufacturing remain 40%–80% higher than the U.S. average.

D&B offers a caveat with its figures. They just represent companies that filed for bankruptcy. They note that it's easy for businesses to just cease operations and disappear without leaving debt or filing for bankruptcy. These are classified as “hidden failures.”

Such failures are a tragedy for those companies, but think about their supply chain partners—especially those that don't bother to keep supply chain metrics. Imagine one day coming into work and calling one of your key customers, ABC Company, and finding the phone's been disconnected. The D&B report concludes that while such business failures may be unavoidable, they don't have to come as a surprise to supply chain partners.

“Using delinquency rates and balances past due, business owners can effectively and proactively anticipate customers' and partners' future financial health and propensity to fail,” the authors write. “It is important for business owners to regularly and systematically review this data as part of their overall business planning process and day to day operations.”

By regularly checking up on the fiscal health of customers and supply chain partners, when negative trends appear, you might consider revising collection behavior to minimize outstanding sales and limit customer exposure. Then, when they show stable or positive trends in delinquency, you can expand their credit line and encourage revenue growth. You could also look for new products and services from these companies that might expand your relationship with them.

Good advice from D&B. But if you consider yourself world class, make sure you're keeping tabs on your own supply chain performance first. It's best not to get to the point where you're depending on the mercy of supply chain partners to stay in the game.

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