How Do You Know If your Supply Chain is Lean Enough

How Do You Know If your Supply Chain is Lean Enough

Having the right metrics is essential because even if you are measuring performance, you may be measuring the wrong things.

The following article is excerpted from Lean Supply Chain & Logistics Management by Paul Myerson (McGraw-Hill, 2012), and is used with permission from the author and publisher.

According to a Bain & Company (www.bain.com) survey and report, “Why Companies Flunk Supply Chain 101,” more than 85 percent of senior executives say improving their supply chain performance is one of their top priorities, but fewer than 10 percent are adequately tracking that performance. Only 15 percent of the companies surveyed said they had full information on supply chain performance at their own companies, and only 7 percent go outside their four walls to track performance of supply chain activities at their vendors, logistics providers, distributors and customers.

Another Bain & Company survey of 300 global companies states that “68 percent of managers think they have failed to optimize their supply chain savings. The ones who do—Walmart, Ford Motor, Dell Computer—all quantify performance indicators for their supply chains by setting targets that push them toward best-in-class status.”

The feedback from Bain & Company is surprising to say the least. Now that we have got your attention, what is it we are supposed to look at?

Policies and Procedures

In general, the performance of a supply chain is the result of policies and procedures that drive various critical segments of the supply chain. The question is, “How can we design metrics to manage organizations recognizing that these organizations are components of complex and highly interconnected systems?”

This question is rapidly gaining importance as supply chain managers face increased pressures on customer service and asset performance. Sony, for instance, is very aware of the fact that any inventory of its products at Best Buy and Walmart ultimately affects its profitability if it remains on the shelf for more than a few days. Sony has changed its delivery metric from “sell-in” to “sell-through.” The difference is that the former metric allowed its sales department to chalk up a sale when the product was shipped to the customer (Best Buy, Walmart, etc.), whereas the latter metric chalks up a sale only when the product is sold and paid for. This is kind of like the “dock to dock” time measurement used in lean manufacturing.

To give another example, Procter & Gamble uses its VMI process to routinely measure both its own inventory and the downstream inventory of its products.

There are many supply chain metrics, some of which can indicate how lean you are. We will discuss some of them now.

Relevant Lean Supply Chain and Logistics Metrics

The SCOR model, developed by the Supply Chain Council (www.supply-chain.org), also can be integrated with your supply chain metrics as they relate to lean. SCOR has come up with five performance attributes, all of which can be related to various forms of waste. They are: delivery reliability, responsiveness, flexibility, cost and asset management.

Delivery Reliability

Under the category of delivery reliability, we can look for waste in terms of shipping the correct product to the correct place and customer at the correct time. This also includes looking at whether or not we have shipped the product in perfect condition and packaging, in the correct quantity with the correct documentation. The resultant metrics measured would include:

Delivery performance—did it both ship and deliver to the client when they originally wanted it. Some companies adjust the delivery date based on availability, change the date in their system and measure performance based on the new delivery/promised date. This results in an inaccurate view of delivery performance.

Order fill rate—it is important to know if an entire customer order shipped complete. This metric is typically a lower percent performance than line item fill rate, which should also be measured.

Accurate order fulfillment (at various levels of detail)—this is a quality measurement that looks at shipping errors, such as the wrong order or item(s) shipped to the customer (or the wrong quantity of requested items).

The culmination of this is the perfect order measure, which calculates the error-free rate of each stage of a purchase order. This measure should capture every step in the life of an order. It measures the errors per order line. For example, consider the following measurements:

➤ Order entry accuracy: 99 percent correct

➤ Warehouse pick accuracy: 99 percent

➤ Delivered on time: 95 percent

➤ Shipped without damage: 98 percent

➤ Invoiced correctly: 99 percent

Our perfect order measure in this case would be 90.3 percent (99 percent × 99 percent × 95 percent × 98 percent × 99 percent). This can be a challenging goal to meet when set at a high level, but it is a valuable form of measurement that points out the interrelationships between different aspects of your supply chain and gives a good idea as to how lean your total supply chain really is.

Responsiveness

Responsiveness measurements relate to how quickly your supply chain and logistics function can deliver products to the customer. They can include measurements such as order fulfillment lead time, transit times, on-time delivery, and even overall cycle or dock-to-dock time (total time key material sits in a facility, which is a good measure of how lean your organization is).

Flexibility

This is a measure of your supply chain’s agility and response time when there are changes in the supply chain. As we know, there can be many unanticipated changes caused by economic, environmental, political and other issues that make this something that can be used for a competitive edge.

Cost

It is, of course, important to manage your supply chain and logistics costs as they are a sign of potential waste. These measures would include cost of goods sold (COGS), total supply chain and logistics cost (in dollars and as a percent of revenue), transportation and distribution costs, warranty/ returns, and a host of other individual costs.

Asset Management

These metrics look at how effectively a company manages assets to meet demand. This includes fixed assets and working capital. Metrics include order-to-cash cycle, inventory and asset turns.

Balanced Scorecard

As there are literally hundreds of potential metrics to measure in the supply chain and logistics function, the use of the balanced scorecard approach can help to narrow it down.

A balanced scorecard is a tool that comes from the principles in the original Malcolm Baldrige Quality Award Criteria, stating that effective leaders take a balanced look at key results measures of an organization instead of relying too much on financial measures, which provide an historical look at organizational performance. So the basis for this tool is that business results are integrated and that management should not view one measure by itself without considering the relation to other results. A balanced scorecard looks at four different views of the business:

1. Financial—to succeed financially, how should we appear to our shareholders?

2. Customer—to achieve our vision, how should we appear to our customers?

3. Internal business processes—to satisfy our shareholders and customers, at what business processes must we excel?

4. Learning and growth—to achieve our vision, how will we sustain our ability to change and improve?

Objectives, measures, targets and initiatives are developed for each of the identified perspectives to ensure success.

Finding the Right Metrics

As competition increases and market forces continually change, supply chain performance management is a critical area for companies to help sustain and gain competitive advantage by enabling an agile, lean and efficient customer-oriented supply chain. One of the first steps in the lean journey is to identify lean project objectives that tie to overall business strategies and objectives, and this includes metrics to measure whether or not your company is successful in attaining these objectives.

As they say, “If you can’t measure something, you can’t improve it.” In some cases, even if you are measuring performance, you may be measuring the wrong things. Examples of where this might occur include where engineering designs products that are without a lean supply chain in mind; accounting focuses on measures for individual processes, but does not consider the performance of the entire process; sales focuses primarily on booking orders without regard for what product mix was planned to be sold and produced; and plant management is focused on shipping dollars, efficiency, utilization and overhead absorption metrics that go “head to head” with the goal of reducing cycle time and customer satisfaction.

Dashboards to Display and Control Metrics

A very common way to measure, analyze and manage supply chain performance is with the use of a dashboard. The dashboard can be as simple as data manually collected and put into a spreadsheet with some graphs, to a more automated, visually pleasing dashboard generated by an ERP system. A supply chain dashboard helps in decision making by visually displaying in real time (or close to it) leading and lagging indicators in a supply chain process perspective.

Indicators

The metrics used in performance dashboards are typically called key performance indicators (KPIs). They usually fall into one of three categories:

1. Leading indicators—have a significant impact on future performance by measuring either current state activities (e.g., the number of items produced today) or future activities (e.g., the number of items scheduled for production this week).

2. Lagging indicators—measures of past performance, such as various financial measurements or, in the case of the supply chain, measurements in areas such as cost, quality and delivery.

3. Diagnostic—areas that may not fit under lead or lagging indicators but indicate the general health of an organization.

Application Areas of a Scorecard

The dashboard, versus a scorecard, is more operational in nature and reviewed more frequently. The dashboard allows for more granular detailed analysis, in addition to the aggregation functionality displayed in the dashboard view.

We can then conclude that it is critical to set meaningful, relevant and attainable targets to ensure that everyone is focused on a lean supply chain, but at the same time, be cognizant of the fact that you do not want to create “paralysis by analysis” where people end up focusing more on the numbers than on the customer.

Paul Myerson is managing partner at Logistics Planning Associates, LLC, a supply chain planning software and consulting business (www.psiplanner.com). He also serves as an adjunct professor at several universities, including Kean University and New Jersey City University. He is the author of a Windows-based supply chain planning software, and co-author of a new lean supply chain and logistics management simulation training game by ENNA.

Related Editorial:

L.B. Foster Creates a One-of-a-Kind Material Flow System

Spread Lean through Your Chain

Employees Seize the Lean Initiative

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