Building a better Supply Chain

April 1, 2005
Working toward continuously improving supply chain performance is high on Joseph Paral's agenda. As director, logistics and operations support with truck

Working toward continuously improving supply chain performance is high on Joseph Paral's agenda. As director, logistics and operations support with truck manufacturer International Truck and Engine Corp.'s Parts Group, he knows he must measure a process to improve it. Therefore, International has key measures for each component of its supply chain.

"On the replenishment end, where International is the customer, we use a balanced scorecard approach to weigh service against cost," Paral explains. For example, if we optimized on service alone, logistics costs could drive up the cost of product, significantly erode profit, or make competitive pricing impossible. However, when we look at a supply chain as containing several events in the replenishment process, timing is critical as each event adds time and cost."

To manage this balance, Paral's team looks at metrics within supplier performance, including days late, fill rate, shipping quality and backorder volume.

"We use a balanced scorecard for each supplier. We also look at aggregate metrics for groups of similar parts and for suppliers overall," Paral adds.

On the carrier performance side, scorecards track transit times, delivery times and cost. Inventory is measured in days of supply, looking at inventory dollars and turn time. "All this is managed closely to meet a worldwide percent-of-fill objective of 98%," he notes.

Within International's parts distribution center (PDC) network, metrics define operating objectives for each PDC. Showing plan, actual and prior year numbers, these metrics drive operations. Key metrics include, but are not limited to:

  • distribution ratio — distribution expense to shipments (sales $$);
  • transportation ratio — transportation expenses to shipments (sales $$);
  • dock-to-stock cycle time;
  • safety — incident frequency and lost time;
  • shipping quality — errors per 10,000 lines shipped;
  • cycle inventory accuracy;
  • shipping efficiency — performance to customer service policies.

On the outbound or forward logistics side of the supply chain, International is moving to a perfect order concept where operational excellence objectives are defined in terms of customer expectations. "The focus is on the customer. Ease and speed of doing business with International are key. As such, excellence for customers means delivering the right parts in the right quantities and within a timedefinite time frame," adds Paral. "We profile each customer, identifying those specific attributes that meet their expectations for delivery times, carriers used, premium routings, etc. We manage the relationship customer by customer."

Internally at International, metrics are the same for each operation. Each unit measures against its individual goals and corporate goals.

According to Paral, "Local operations need to see how they're operating to their goals. We also need to see how we're doing overall so we add up the scores to see the total entity's performance."

Adding up the total buy at a company the size of high-tech giant IBM Corp. makes a lot of sense.

"We moved procurement into one worldwide organization to leverage IBM's buy," explains Tim Carroll, vice president operations with IBM's Integrated Supply Chain (ISC) group.

"We set up a commodity council so we know what changes we can expect in commodities and technology. We make sure we're in a proactive rather than a reactive position. And we measure how we're managing in terms of cost optimization."

Big Blue has a rigid supplier review process, Carroll notes. The company's quality review scorecard tracks how each supplier performs, looking at cost, financial strength, stability, and how the supplier delivers to IBM requirements.

"We routinely review scorecards with suppliers, including transportation providers, working as partners to improve the relationship. If needed improvement doesn't occur, the scorecard is our basis for no longer considering that supplier a vendor of choice," states Carroll.

IBM's ISC operating team meets weekly to analyze performance to various metrics.

"We look for what we need to change or alter to meet our objectives," Carroll says. "We drill down to find what's keeping us from meeting our objectives."

At the functional level, daily reports show each executive where the team needs to deal with issues and where it stands on meeting its objectives. "As we move up the ladder, each week, the operating team addresses any variances in meeting objectives," he points out. Every two weeks, Bob Moffat, senior vice president with ISC, presents the overall status of the group to IBM's CEO," Carroll adds.

"Every IBM executive has real-time visibility to these key metrics, and they know the CEO spot checks performance because he fires off a memo when he sees something noteworthy," concludes Carroll.

"Time is money — the longer and slower the supply chain, the more costly it is," says Patrick Arlequeeuw, vice president, Consumer-Driven Supply Network Implementation with consumer packaged goods giant Procter & Gamble Co. "When you take time and cost out of the supply network, you increase flexibility and responsiveness. Instead of a long, slow chain from raw materials to the finished product on the shelf, we are creating a network of suppliers, manufacturers and retailers that facilitates realtime information flow between all these partners, starting with what's happening at the shelf."

Measuring end-to-end time across the supply network is critical, Arlequeeuw points out. For P&G, the fundamentals include key measures like shelf quality, product availability and on-time delivery.

"As we implement our consumer-driven supply network strategy, we are driving more externally focused measures based on how the supply network serves consumers and retailers. For example, the percent of categories in which P&G products have out of stocks higher than 5% has decreased from 57% to 40%," he says.

"A key ingredient in developing effective metrics is periodically testing and refreshing them. To stay on top of our metrics, we perform a series of benchmarking efforts," states International's Paral.

"We think of our benchmarking approach as concentric circles," he continues. "Within the smallest circle, we compare ourselves to those in direct competition in our industry. Since they are not necessarily the best in supply chain, we expand the circle to durable goods companies, typically in agriculture, construction, automotive, or aerospace."

To find best-in-class performance for specific metrics like quality or safety, Paral's team enlarges the circle to include companies outside their industry. "Who in the parts distribution business does it best? We keep expanding our view to benchmark world-class leaders in the distribution of goods," says Paral.

IBM looks outside the high-tech industry to benchmark. "We benchmark customer satisfaction against our competition and against other industries such as automotive," says Carroll. "We benchmark procurement within our industry but also use outside teams and historical trends.

On a regular basis, P&G takes part in industry surveys to benchmark how it is serving retail customers. "In addition to these surveys, we also work directly with retailers to continuously improve our service levels," says Arlequeeuw.

"We can deliver significant value to our retail customers and to consumers if we achieve a produce-todemand system for our industry the way Dell has for the personal computer business," he adds.

Through implementation of its consumer-driven supply network strategy, P&G is driving consumer needs deeper into the supply network with a goal of increasing responsiveness and flexibility.

"It's based on a vision of using a consumer purchase to trigger real-time information movement throughout the supply network," explains Arlequeeuw. "This requires a fundamental change in how supply networks are designed. It means looking at the supply system from the shelf back and determining what is required to deliver the desired consumer experience."

At IBM, supply chain initiatives also focus on the customer. "Is what we're doing creating a positive effect on the customer experience?" That's the question Carroll and his coworkers within IBM's ISC group ask of everything they do. "Are we making it easy to do business with IBM? Are we meeting or exceeding customer expectations?" he asks.

To answer these questions, ISC executives meet with key accounts at least once a quarter. And they build into customer contracts the four or five metrics both parties consider will best tell how the partnership is working.

"To increase customer satisfaction, we do transaction surveys. And our advisory councils meet with customers from around the globe. We get input on the effectiveness of our solutions and how we deliver those solutions," says Carroll. "In addition, each executive is assigned to work with key global accounts and business partners to understand if there is more we could do to provide solutions and enhance the experience with IBM."

Whether your focus is on the customer or cost or growth, measure what you're doing. You have to know where you are to improve.

IBM, International Truck and Procter & Gamble were named to Logistics Today's annual list of the 10 Best Supply Chains. To read that article, click here


IBM Corp.

International Truck and Engine Corp.

Procter & Gamble Co.

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