CHAPTER 5
Metrics for Measuring Supply Chain Performance
After reading this chapter you will be able to
- Employ a useful model for assessing markets and the supply chains that support them
- Define a concise set of metrics for measuring the performance of a company's supply chain operations
- Discuss ways to collect and display supply chain performance data
- Use performance data to spotlight problems and opportunities
Supply chains are fluid and are continuously adjusting to changes in supply and demand for the products they handle. To get the performance desired from supply chains requires a company to monitor and control its operations on a daily basis. This chapter introduces four performance categories that each supply chain participant should measure. It then discusses the performance metrics that can be used in each of these performance categories. The chapter also explores some of the technology that can be used to collect, store, and present performance data.
Useful Model of Markets and Their Supply Chains
A supply chain exists to support the market that it serves. To identify the performance that a supply chain should deliver, we need to evaluate the market being served. In support of this analysis we will employ a simple model. The model allows us to categorize a market and identify the requirements and opportunities that each kind of market presents to its supply chains. Reality is, of course, more subtle and more complex than any model can represent but this model can point you in the right direction and guide you through an investigation of the markets your company serves.
Let us start by defining a market using its two most basic components—supply and demand. A market is characterized by its combination of supply and demand. This model defines four basic kinds of markets, or market quadrants. In the first quadrant is a market where both supply and demand for its products are low and unpredictable. Let's call this a developing market. In the second quadrant is a market where supply is low and demand is high. This is a growth market. The third quadrant contains a market where both supply and demand are high. There is a lot of predictability in this market so call this a steady market. In the fourth quadrant, this kind of market supply is higher than demand. This is a mature market.
In a developing market, both supply and demand are low and also uncertain. These are usually new markets that are just emerging. These markets are created by new technology becoming available or by social and economic trends that cause a group of customers to perceive some new set of needs. Opportunities in a developing market are in the areas of partnering with other players in the supply chain to gather intelligence about what the market wants. Cost of sales is high in this market and inventories are low.
Growth markets are markets where demand is higher than supply and so supply is often uncertain. If a developing market solidifies and builds up momentum, it can suddenly take off and for a time there is a surge in demand that suppliers cannot keep up with. Opportunities in a growth market are in providing a high level of customer service as measured by order fill rates and on-time deliveries. Customers in a market like this value a reliable source of supply and will pay premium prices for reliability. Cost of sales should be low since customers are easy to find and inventories can be higher because they are increasing in value.
In a steady market both supply and demand are high and thus relatively predictable. This is an established market where market forces have been at work for a while and have pretty well balanced supply and demand. Opportunities here lie in fine tuning and optimizing internal company operations. Companies should focus on minimizing inventory and cost of sales while maintaining high levels of customer service.
In a mature market, supply has overtaken demand and excess supply capacity exists. Demand is reasonably stable or slowly falling but because of the fierce competition due to oversupply, demand seems uncertain from the point of view of any one supplier in this market. Opportunities in this market are in the area of flexibility as measured by an ability to respond quickly to changes in product demand while maintaining high levels of customer service. Customers in a market like this value the convenience of “one stop shopping” where they can purchase a wide variety of related products at low prices. Inventories should be minimized and the cost of sales are somewhat higher due to the expense of attracting customers in a crowded market.
Market Performance Categories
Markets in each quadrant have their own mix of opportunities for the supply chains that support them. A different mix of performance characteristics is required of companies in the supply chains of each kind of market. In order to thrive, the companies in a supply chain must be able to work together to exploit the opportunities available in their markets. The highest profits go to the companies that can successfully respond to the opportunities their markets offer. Companies that are unable to respond to opportunities as effectively will fall behind.
TIPS & TECHNIQUES
Each Market Quadrant Presents Different Opportunities
What are the markets your company serves? What quadrants are they in? How can your company respond to the opportunities in these markets?
In Chapter 1 we introduced two characteristics that describe supply chain performance—responsiveness and efficiency. We all intuitively know what these two characteristics imply, but now we need to define them in more precise terms so that they can be measured objectively. We will use four measurement categories:
- Customer Service
- Internal Efficiency
- Demand Flexibility
- Product Development
Customer Service
Customer service measures the ability of the supply chain to meet the expectations of its customers. Depending on the type of market being served, the customers in that market will have different expectations for customer service. Customers in some markets both expect and will pay for high levels of product availability and quick delivery of small purchase quantities. Customers in other markets will accept longer waits for products and will purchase in large quantities. Whatever the market being served, the supply chain must meet the customer service expectations of the people in that market.
Internal Efficiency
Internal efficiency refers to the ability of a company or a supply chain to operate in such a way as to generate an appropriate level of profitability. As with customer service, market conditions vary and what is an appropriate level of profit varies from one market to another. In a risky developing market, the profit margins need to be higher in order to justify the investment of time and money. In a mature market where there is little uncertainty or risk, profit margins can be somewhat lower. These markets offer the opportunity to do large volumes of business and to make up in gross profit what is given up in gross margin.
Demand Flexibility
This category measures the ability to respond to uncertainty in levels of product demand. It shows how much of an increase over current levels of demand can be handled by a company or a supply chain. It also includes the ability to respond to uncertainty in the range of products that may be demanded. This ability is often needed in mature markets.
Product Development
This encompasses a company and a supply chain's ability to continue to evolve along with the markets they serve. It measures the ability to develop and deliver new products in a timely manner. This ability is necessary when serving developing markets.
A Framework for Performance Measurement
There are other demands that real-world markets place on their supply chains; however, by using these four performance categories we can create a useful framework. This framework describes the mix of performance required from companies and supply chains that serve the four different market quadrants. When a company identifies the markets it serves it can then define the performance mix required by those markets in order to best respond to the opportunities they provide.
Markets in the first quadrant, developing markets, require their supply chains to excel in product development and customer service. Growth markets require very high levels of customer service, particularly as measured by order fill rates and on-time delivery. Steady markets require internal efficiency as well as an even broader scope of customer service. Mature markets require all the internal efficiency and customer service called for by steady markets. They also require the highest levels of demand flexibility.
The most profitable companies and supply chains are those that deliver the performance called for by their markets. These organizations are the most profitable because they are the ones most able to respond effectively to the opportunities offered by their markets. Companies should collect and track a handful of performance measures that cover these four areas. This will give them valuable information about how well they are responding to their markets.
The metrics that measure performance in the four areas are applicable to individual companies and also to entire supply chains. It is harder to gather these metrics for entire supply chains because companies are reluctant to share data that may be used against them by their competitors or by their customers or suppliers. There are issues of trust and incentive to work out before these metrics can readily be collected for an entire supply chain. Nonetheless, when these issues are worked out, these metrics will help to guide the behavior of the entire supply chain and should benefit all the participants in that chain over the long term.
Customer Service Metrics
In the words of Warren Hausman, a professor at Stanford University, “Service relates to the ability to anticipate, capture, and fulfill customer demand with personalized products and on-time delivery” (Hausman, Warren H., 2000, “Supply Chain Performance Metrics,” Management Science & Engineering Department, Stanford University). The reason that any company exists is to be of service to its customers. The reason that any supply chain exists is to serve the market it is attached to. These measures indicate how well a company serves its customers and how well a supply chain supports its market.
Market Quadrants Require a Different Mix of Performance
Does your company excel in the performance categories that relate to the markets you serve? Profit opportunities lie in being a leader in the mix of performance categories that your markets call for.
There are two sets of customer service metrics, depending on whether the company or supply chain is in a build-to-stock (BTS) or build-to-order (BTO) situation. Popular metrics for a build to stock situation are:
- Complete Order Fill Rate and Order Line Item Fill Rate
- On-Time Delivery Rate
- Value of Total Backorders and Number of Backorders
- Frequency and Duration of Backorders
- Line Item Return Rate
Popular metrics for a build-to-order situation are:
- Quoted Customer Response Time and On-Time Completion Rate
- On-Time Delivery Rate
- Value of Late Orders and Number of Late Orders
- Frequency and Duration of Late Orders
- Number of Warranty Returns and Repairs
Build to Stock
A build-to-stock (BTS) situation is one where common commodity products are supplied to a large market or customer base. These are products such as office supplies, cleaning supplies, building supplies, and so on. Customers expect to get these products right away any time they need them. Supply chains for these products must meet this demand by stocking them in inventory so they are always available.
In a BTS environment a customer wants their complete order to be filled immediately. This may be expensive to provide if customer orders contain a wide range and number of items. It is costly for companies to carry all those items in stock so they may have backup plans to provide expedited delivery of items not in stock or substitution of upgraded items for those not in stock. The order-fill rate measures the percentage of total orders where all items on the order are filled immediately from stock. The line-item fill rate is the percentage of total line items on all orders that are filled immediately from stock. Used together, these two measures track customer service from two important perspectives.
Build to Order
A build-to-order (BTO) situation is one where a customized product is ordered by a customer. This is any situation where a product is built based on a specific customer order and is configured to meet a unique set of requirements defined by the customer. An example of this is the way Boeing builds airplanes for specific customers and their requirements or the way Dell Computer assembles PCs to fit individual customer orders and specifications.
In a BTO environment it is important to track both the quoted customer response time and the on-time completion rate. It is easier for a company to achieve a high on-time completion rate if it quotes longer customer response times. The question is whether the customer really wants a short response time or will accept a longer response time. The quoted response time needs to be aligned with the company's value proposition and competitive strategy.
Internal Efficiency Metrics
Internal efficiency refers to the ability of a company or a supply chain to use their assets as profitably as possible. Assets include anything of tangible value such as plant, equipment, inventory, and cash. Some popular measures of internal efficiency are:
- Inventory Value
- Inventory Turns
- Return on Sales
- Cash-to-Cash Cycle Time
Inventory Value
This should be measured both at a point in time and also as an average over time. The major asset involved in a supply chain is the inventory contained throughout the length of the chain. Supply chains and the companies that make them up are always looking for ways to reduce inventory while still delivering high levels of customer service. This means trying to match inventory availability (supply) with sales (demand) and not have excess inventory left over. The only time a company would want to let inventory exceed sales is in a growth market where the value of the inventory will increase. However, markets change and as a rule it is best to avoid excess inventory.
Inventory Turns
This is a way to measure the profitability of inventory by tracking the speed with which it is sold or turned over during the course of a year. This measure is often referred to as “turn and earn” (T&E). It is calculated by the equation:
Turns = Annual Cost of Sales / Annual Average Inventory Value
Generally, the higher the turn rate the better, although some lower-turning inventory needs to be available in order to meet customer service and demand flexibility.
Return on Sales
Return on sales is a broad measure of how well an operation is being run. It measures how well fixed and variable costs are managed and also the gross profit generated on sales:
Return on Sales = Earnings before Interest and Tax / Sales
Again, as a rule, the higher the return on sales the better. There are times though when a company may deliberately reduce this number in order to gain or defend market share or to incur expenses that are necessary to achieve some other business objective.
Cash-to-Cash Cycle Time
This is the time it takes from when a company pays its suppliers for materials to when it gets paid by its customers. This time can be estimated with the following formula:
Cash-to-Cash Cycle Time = Inventory Days of Supply + Days
Sales Outstanding – Average Payment Period on Purchases
The shorter this cycle time the better. A company can often make more improvements in their accounts payable and receivable areas than they can in their inventory levels. Accounts receivable may be large due to late payments caused by billing errors or selling to customers who are bad credit risks. These are things a company can manage as well as inventory.
Demand Flexibility Metrics
Demand flexibility describes a company's ability to be responsive to new demands in the quantity and range of products and to act quickly. A company or supply chain needs capabilities in this area in order to cope with uncertainty in the markets they serve. Some measures of flexibility are:
- Activity Cycle Time
- Upside Flexibility
- Outside Flexibility
- Activity Cycle Time
The cycle time measures the amount of time it takes to perform a supply chain activity such as order fulfillment, product design, product assembly, or any other activity that supports the supply chain. This cycle time can be measured within an individual company or across an entire supply chain. Order fulfillment within a single company may be fast but that company may only be filling an order from another company in the supply chain. What is important is the cycle time for order fulfillment to the ultimate end-use customer that the entire supply chain is there to serve.
Upside Flexibility
It is the ability of a company or supply chain to respond quickly to additional order volume for the products they carry. Normal order volume may be 100 units per week for a product. Can an order be accommodated that is 25 percent greater one week or will the extra product demand wind up as a backorder? Upside flexibility can be measured as the percentage increase over the expected demand for a product that can be accommodated.
Outside Flexibility
This is the ability to quickly provide the customer with additional products outside the bundle of products normally provided. As markets mature and technologies blend, products that were once considered outside of the range of a company's offerings can become a logical extension of its offerings. There is danger in trying to provide customers with a new and unrelated set of products that has little in common with the existing product bundle. However, there is opportunity to acquire new customers and sell more to existing customers when outside flexibility is managed skillfully.
Product Development Metrics
Product development measures a company or a supply chain's ability to design, build, and deliver new products to serve their markets as those markets evolve over time. Technical innovations, social change, and economic developments cause a market to change over time. Measurements in this performance category are often overlooked, but companies do so at their own peril. A supply chain must keep pace with the market it serves or it will be replaced. The ability to keep pace with an evolving market can be measured by metrics such as:
TIPS & TECHNIQUES
Performance Measures in the Four Categories
Companies need to track some or all of these metrics to get an accurate picture of their capabilities in the four performance categories.
- Percentage of total products sold that were introduced in the last year
- Percentage of total sales from products introduced in the last year
- Cycle time to develop and deliver a new product
Operations that Enable Supply Chain Performance
In order for an organization to meet the performance requirements of the markets it serves, it must look to measure and improve its capabilities in the four categories of supply chain operations:
- Plan
- Source
- Make
- Deliver
EXECUTIVE INSIGHT
Supply chains created in the last several decades often focused on producing and delivering products at the lowest price. That worked best when product life cycles were longer and sales forecasts were more accurate. But now, due to the rate of technical and economic change in our global economy, product life cycles are measured in months, prices of component parts, fuel, and labor fluctuate constantly, and sales forecasting is much harder. Supply chains need to focus on responding to constant change. Shoshanah Cohen, Director Emeritus of PRTM Management Consulting, explains why supply chains must balance needs for efficiency and low cost with needs for responsiveness and high customer service.
Traditional supply chain metrics focus on efficiency and productivity, whereas financial metrics focus on cost, revenue, and profitability. While it's not uncommon to find supply chain performance management programs that use both operational and financial metrics, many companies don't do this particularly well.
As an example, a leading manufacturer of personal computer peripherals relied on a business strategy based on ongoing innovation and frequent new product introductions. Product managers were measured on their ability to design, develop, and release a constant stream of profitable new products, while growing market share for their particular categories. A make-to-stock supply chain supported this strategy so that customers could order and receive products immediately after they were released. Supply chain metrics tracked on a regular basis included material and product costs, delivery performance, fill rate, and transportation costs.
Because the company expected every product to maximize its potential margin, the supply chain was optimized to manufacture at the lowest possible unit cost. That meant developing low-cost material suppliers and setting up production in low-cost countries, including several relationships with large original design manufacturers (ODMs) in Asia and a large company-owned plant in China. Standard product costs were established based on anticipated material prices, planned production schedules, and ocean shipment for virtually all products. Standard product margins, therefore, reflected best-case scenarios for procurement, production, and distribution, and variances were due to fluctuations in selling price.
Although most manufacturing sites were in Asia, most of the company's business was in North America and Europe. Standard ocean shipment meant that products took up to five weeks to reach regional distribution centers, making the strategic objective of fast order fulfillment a major challenge. “We're very dependent on an accurate forecast,” explains the company's Vice President of Global Supply Chain, “but the peripherals market is pretty volatile. Plus we have constant product introductions and phase-outs and a lot of slips in the product development schedule, even though product release dates rarely shift to accommodate them.”
Expediting was one of the few levers available to increase flexibility amid the combination of complexity and forecast inaccuracy— and was used frequently. Shipping raw materials and finished goods by air rather than sea nearly tripled transportation costs, but was necessary to maintain targeted customer-service levels. When necessary, the company also reworked products at regional distribution centers to align availability with current demand. “We recognize that this is also a very expensive option,” notes the Supply Chain VP, “especially since our whole cost model is based on producing in locations with low labor rates. But this is the only way we can meet our fill-rate and on-time delivery objectives.”
The resulting costs were charged to the supply chain group, appearing in quarterly financial reports as unplanned/incremental expenses. While this had a significant impact on the perceived performance of the supply chain organization, product management didn't see these added costs as an issue. Because they were not added to the product standard cost, they were virtually invisible to product managers.
Of course, the total cost of managing the supply chain increased significantly as the organization struggled to provide the required flexibility. “We got pummeled every time the quarterly financial reports came out,” the Supply Chain VP explains, “it looked like our spending was out of control. We needed to find a way to get the rest of the company to understand that it wasn't just a supply chain issue, even though the way we were measuring performance made it look that way. We needed a better balance of financial and operation metrics.”
To address this problem, the company modified its enterprise resource planning (ERP) cost module so that expedite and rework costs could be allocated to each major product group and their impact analyzed. “We would have liked to have been able to do this on a product-by-product basis,” notes a financial analyst, “but the cost of putting that level of granularity in place was prohibitive.” But even at a product-group level, the impact was clear: for many products, the costs of accommodating development delays and forecast inaccuracy through air shipment and local reconfiguration was enough to wipe out profitability for some products.
Product managers were not happy with the new means of measurement. “We hadn't changed anything we were doing,” explains one Product Manager, “but suddenly it looked like our margins were degrading.” The executive management team stood firm despite numerous complaints from the product groups, and directed them to focus more attention on forecasting and compliance with established product-development schedules. The new metrics became the catalyst needed to move forward with several major initiatives: improving the forecasting process, increasing product modularity and configurability, and updating systems and processes to enable increased parts commonality.
Of course changing the way costs are allocated does nothing in and of itself to reduce costs or optimize a supply chain. But simply increasing visibility can drive changes in behavior that can lower the overall cost of managing a supply chain.
This example is not unusual. As this company found, measuring operational metrics in isolation can be a counterproductive way to use performance-related data. A more effective approach is to start with the company's strategic goals, identify the supply chain configuration necessary to support the strategy, and then derive operational and financial performance metrics that support those goals.
Shoshanah Cohen is Director of the Stanford Global Supply Chain Management Forum, a research institute in partnership with industry and the Graduate School of Business at Stanford University. The Forum's mission is to advance the theory and practice of excellence in global supply chain management through, research, development, and dissemination of best practices within a dynamic and increasingly global business environment. She is also co-author of Strategic Supply Chain Management: The Five Disciplines for Top Performance (McGraw-Hill, 2005).
The efficiency with which these activities are carried out will ultimately determine how well a company performs as measured by things such as order and line-item fill rate, on-time delivery, inventory turns, and cash-to-cash cycle time. Certain activities are directly related to certain performance categories. For instance, inventory management will directly affect a company's order and line-item fill rate and its inventory turns. Its procurement activity will directly affect its return on sales and upside ability. A company needs to collect data about its activities in these four operational areas and monitor results.
The Supply-Chain Council's supply chain operations reference (SCOR) model suggests the kind of operational data that should be collected. This data is referred to as “Level 2 Performance Metrics.” In the plan operation, useful measures are the cost of planning activities, inventory financing costs, inventory days of supply on hand, and forecast accuracy. In the sourcing operation, it is useful to have data on material acquisition costs, sourcing cycle times, and raw material days of supply. Useful measures in the make operation are the number of product defects/complaints, make cycle times, build-order attainment rates, and product quality. Suggested delivery operation measures are fill rates, order-management costs, order lead times, and item-return rates.
This data should be collected regularly and trends should be watched. When performance targets start to be missed, the next step is to investigate the business operations that support that performance. Again, the SCOR model suggests more detailed data that can be collected and analyzed in each of the four supply chain operating areas. This more detailed data is referred to as “Level 3 Diagnostic Metrics.”
Diagnostic metrics can be used to analyze the complexity and configuration of the supply chain and also to study specific practices. In the plan operation, complexity measures are the number and percentage of order changes, number of stock keeping units (SKUs) carried, production volumes, and inventory carrying costs. Configuration measures track things such as product volume by channel, number of channels, and number of supply chain locations. Measures of management practices in the plan operation are such things as planning cycle time, forecast accuracy, and obsolete inventory on hand.
In the source operation, measures of complexity and configuration are number of suppliers, percentage of purchasing spending by distance, and purchased material by geography. Some practice measurements are supplier delivery performance, payment period, and percentage of items purchased by their associated lead time.
The make operation has measures of complexity and configuration such as number of SKUs, upside production flexibility, manufacturing process steps by geographical location, and capacity utilization. Management practice measurements are value-added percentage, BTO percentage, BTS percentage, percentage of manufacturing order changes due to internal issues, and work in process inventory.
In the fourth supply chain operation, deliver, there are complexity measures that include number of orders by channel, number of line items and shipments by channel, and percentage of line items returned. Configuration measures are delivery locations by geography and number of channels. Practice measures cover things like published delivery lead times, percentage of invoices that contain billing errors, and order entry methods.
Business Operations Support Company Performance
Every business operation indirectly affects overall supply chain performance but certain operations have a strong effect on specific categories of performance. This table shows the performance categories that are most strongly affected by each business operation.
Collecting and Displaying Performance Data
Historically, companies based their management decisions on periodic, standard reports that showed what happened during some period in the past. In stable and slow-moving business environments this worked well enough. However, there are not many companies that work in stable and slow-moving environments any more. Working from traditional, periodic, accounting-oriented reports in a fast-paced world is somewhat like trying to drive a car by looking into the rearview mirror.
The business environments we live in are characterized by shorter product life cycles, mass markets dissolving into smaller niche markets, and new technology and distribution channels constantly opening up new opportunities. The pace of change is both exhilarating and relentless. A company must keep up. To do this, a company needs to build a business intelligence (BI) system that presents data at three levels of detail:
- Strategic—to help top management decide what to do
- Tactical—to help middle management decide how to do it
- Operational—to help people actually do it
Three Levels of Detail
In a supply chain management context, strategic data consists of current actual, as well as plan and historical numbers that show the company's standing in the four performance categories: customer service; internal efficiency; demand flexibility; and product development. In the Supply-Chain Council SCOR model, data of this type is referred to as “Level 1” data. This data is summarized by major business units and for the company as a whole. Strategic data also consists of data from outside the company such as market sizes and growth rates, demographics, and economic indicators such as GNP, inflation rates, and interest rates. There should also be benchmark data from industry trade associations and studies that show the operating standards and financial performance levels that are standard for companies in the markets being served.
TIPS & TECHNIQUES
Supply Chain Performance Metrics and Diagnostic Measures (Supply-Chain Council SCOR Model)
Tactical data consists of actual, plan, and historical numbers in the four performance categories displayed at the branch office level of detail. This data also includes the performance metrics labeled “Level 2” in the SCOR model. These metrics monitor the plan, source, make, and deliver operations that every company in a supply chain must perform.
Operational data consists of the measures labeled “Level 3” in the SCOR model. These measurements help people who are charged with getting a job done to understand what is happening and to find ways to make improvements where needed to meet the performance targets that have been set. The SCOR model refers to these measurements as diagnostic measures.
We are awash in data. It is important to present it in such a way that it is useful. If people are overwhelmed with data they cannot use it. By organizing data into these three levels, people can quickly access what they need to do their jobs. Upper management uses strategic-level data to assess market conditions and set business-performance objectives. They can drill down to the tactical level or even the operational levels when necessary. Middle managers use tactical data to do planning and resource allocation to achieve the performance objectives set by upper management. Line managers and their staffs use operational data to solve problems and get things done.
The Data Warehouse
To collect this data requires the creation of a data warehouse. This data warehouse is a central repository of data that is drawn from a variety of operating systems and accounting systems in a company. It is important to collect the needed data at its source. Tap into relevant systems within a company and capture needed data automatically as a by-product of daily operations. Avoid having people do manual entry to get data into the data warehouse.
A data warehouse is composed of a database software package and the automated connections to other systems needed to collect the relevant data on a regular and timely schedule. Working in conjunction with the database software is software that allows for the creation of standard predefined reports and graphic displays which people can use to monitor operations. In addition to predefined reports and displays, the software must also allow people to do ad hoc queries of the data in the data warehouse, permitting detailed investigations when necessary.
When designing and building a data warehouse it is best to start quickly with something that is simple and on a smaller scale. This way people can get experience in using data more actively to do their jobs. As they gain experience and can clearly describe the additional features they would like, larger and more complex data warehouses can be built. Remember, the most important component in any data warehouse system is not the technology, or even the data, but the people who use the system and their ability to use the system effectively to learn from the data and become more efficient at their jobs. Chapter 7 goes into further detail about the design and building of these kinds of systems.
In addition to helping people inside a company become more efficient in performing their supply chain management jobs, a data warehouse can also be the foundation for collaboration with other companies in the supply chain. Whatever information is shared between companies in a supply chain should be made available to those other companies electronically. This often takes the form of reports that can be retrieved on demand by other companies, who access a company's data warehouse over the Internet using features of the same data-reporting software that people inside the company use (see Exhibit 5.1).
Spotlighting Problems and Finding Opportunities
Depending on the type of markets a company serves, senior management needs to define a handful of key performance targets in the areas of customer service, internal efficiency, demand flexibility, and product development. The task then becomes one of figuring out how to manage operations to achieve the target numbers. The point of collecting performance data is to help monitor and control daily, weekly, and monthly operations.
Display Different Views of Data to Different Audiences
The data warehouse supports views of data at the strategic, tactical, and operational levels. This makes it easy for management and staff in a company to get quick access to the data they need to do their jobs. The data warehouse also supports the sharing of data with customers and suppliers needed to coordinate supply chain activities.
People in a company need access to a one-page display of the key operating or financial measures that they are responsible for achieving. These one page displays are known as “dashboards” because they show a person at a glance the data that is most important to them. The data that is displayed on a senior management dashboard is different from that on an operating manager's dashboard and the data on the dashboard of a staff person in one department is different from a staff person's in another department.
Senior management sets company performance targets and they need access to a dashboard report that shows them the company's current performance against these targets. If things are going well and performance is meeting expectations, then no further attention is called for, but if performance is falling short against one or more of the performance targets, then the senior manager knows right away where more attention is needed.
Middle managers are responsible for managing their operations to achieve one or more of the company's performance targets. Their dashboards need to show them the plan and actual data on company performance targets they are responsible for. They need to see quickly if operations are on target or not and direct their attention accordingly. Once alerted by their dashboard that there is a problem in a particular area, the manager can then drill down into further detail in that area.
Staff people in various departments need dashboards that track and illuminate the specific business operations that they are responsible for such as purchasing, credit, inventory management, and so on. These displays should highlight issues needing their attention.
For the most part, people run their businesses or do their jobs by keeping track of a handful of key indicators. These indicators tell them where to direct their attention and help them steer through a complex and changing world. When a data warehouse and software reporting tools are in place in a company, people need to experiment with the design of their dashboard displays or reports. As they get better at using their dashboards to guide their actions, the overall effect will be for the company as a whole to become more efficient and more responsive to its markets.
Since very few companies work in stable and slow-moving markets anymore, there is a great need to learn to use data effectively to make decisions and act. Speed is a major competitive advantage. The faster a company can spot problems and fix them or see opportunities and respond to them, the more profitable the company will be. It will also have a much better chance of survival over the long term. Companies that can see their markets change and adjust and follow those markets most efficiently are the ones that will stay in business. Companies that do not notice problems soon enough or that do not see how their markets change are the ones that will get into trouble (see Exhibit 5.2).
Markets Migrate from One Quadrant to Another
Markets migrate from one quadrant to another during the course of their life cycle. Over time, market forces are always pushing a market toward an equilibrium where supply meets demand. At the same time, other forces also influence a market so it fluctuates back and forth around the equilibrium point. At times demand outstrips supply and at other times there is more supply than there is demand.
Companies in the supply chains that supply a market must be able to adjust their operations over time as their markets migrate from one quadrant to another in order to remain competitive. For instance, in growth markets, supply chains that do the best are the ones that have the highest levels of customer service as measured by order-fill rate and on-time delivery. All the companies in the supply chain must focus on delivering this performance in order to succeed.
As a growth market moves on to a steady market, the most profitable companies will be those that are able to maintain high levels of existing customer service and also broaden the scope of their customer services. In addition, profitable companies will be the ones that achieve the best levels of internal efficiency. They can no longer focus only on customer service.
Dashboard Designs Are Different at Each Level
Dashboard Designs Are Different at Each Level
People at different levels in an organization need to design their dashboard displays so that they get quick and easy access to the data they need to do their jobs and monitor their progress.
As steady markets become mature markets, the supply chains that serve them must again develop their performance in another category. Mature markets require companies to develop the capabilities needed to accommodate high levels of demand flexibility. Then in the midst of mature markets, new developing markets can appear and the ability to create new products and bring them to market becomes critical.
Adaptability itself is now as important to survival and success as the four performance categories. Market evolution is now often measured in years and sometimes in months. Gone are the days when markets changed more slowly over decades. No company has the luxury of being able to focus on optimizing any single mix of performance capabilities over the long term.
A company may become very skilled at internal efficiency and customer service as called for in a steady market. The company needs to remember though that its markets will change. The company will have to add skills in the area of demand flexibility as some of its markets mature. The company may even need to de-emphasize some of its internal efficiency policies in order to emphasize its performance in product development so that it can participate in a promising developing market. The key here is that a company needs to know when to shift its emphasis from one mix of performance categories to another.
A ship at sea needs to watch the wind and the waves and respond appropriately when the weather changes. So too must a company watch the supply and demand situation in its markets and respond appropriately when one of its markets enters a new quadrant. If the collection and display of market and company performance data alert a company to respond sooner to a market change than its competitors, then the company has indeed developed an important tool for its success and survival (see Exhibit 5.3).
Market Conditions Shift Over Time
A market (call it Market ‘X’) follows a life cycle. It develops and then it goes on to become a growth market which leads to a steady market and then a mature market and so on. Over time the forces of supply and demand are always pushing the market toward a steady state where supply and demand are equal yet at the same time other forces disrupt this balance.
The supply chains that support Market ‘X’ need to be able to provide first one kind of performance and then another as the market moves through its life cycle. The companies that are most successful in supplying this market are those that can adapt their performance appropriately to follow the market as it changes.
Sharing Data Across the Supply Chain
As markets migrate from one quadrant to another, there are great demands placed on the supply chains that support them. In fact, it is sometimes the operation of the supply chain itself that can push a market from one quadrant to another. A case in point is illustrated by the beer game simulation described in Chapter 6. This simulation shows how a slight change in demand by the end customer or the market can cause wildly escalating product demand forecasts to be sent to companies further down the supply chain. This “bullwhip” effect results in the production of large quantities of inventory which can then outstrip the real demand in the market. This event becomes the event that pushes a market out of the steady quadrant and into the mature quadrant. As excess inventory gets used up, it gradually brings the market back into the steady quadrant.
The cure for the bullwhip effect is better sharing of data among all the companies in a supply chain. Companies need to work through their concerns about sharing data that many of them might consider confidential. There are serious questions to be answered. What data is it reasonable to share? How can privacy of critical data be maintained? What are the benefits of sharing data and how can they be quantified?
Hau Lee is a professor at Stanford University's business school and director of the Stanford Global Supply Chain Management Forum. He envisions the supply chain as an “intricate network of suppliers, distributors, and customers who share carefully managed information about demand, decisions, and performance, and who recognize that success for one part of the supply chain means success for all.”
If each company had demand information from the other companies in its supply chain, it would help everyone to make the best decisions about how much manufacturing capacity to build and how much inventory to hold. Companies need to see demand information from their immediate customers and also from the end customers that the supply chain ultimately supports.
In addition to sharing demand data across the supply chain, companies need to share decisions they make that have supply chain implications. A company could be unaware of decisions made by one of its customers or one of its customer's customers that will have a big impact on product demand. For instance, a chain of retail stores may decide to run a special promotion on a certain group of products. An analysis of past seasonal sales data would not predict the spike in demand that will result from running this promotion. So if the retail store chain does not share this decision with its suppliers, there is a very good chance they will be caught short and not be able to deliver enough product to support the promotion.
It is also important for companies to let each other know how well they are doing in the performance of their supply chain activities. These metrics can then be combined to provide a holistic picture of the performance of the entire supply chain. When each company in a supply chain sees how the supply chain is working overall, then each company can make better individual decisions about where performance improvements are needed.
At present, companies are most likely to share demand information with each other. There is already a lot of precedent for doing this. However, companies are much less likely to share their decisions or performance metrics because they are afraid that if this information gets out, it could wind up in the hands of their competitors and be used against them. The need for sharing this information continues to grow though. Customers continue to demand more and more from their supply chains. In an interview with CIO Magazine for an article titled “The Cost of Secrecy,” Professor Hau Lee said, “If you are late because your distributor is late, your customers will go to a competitor whose distributor isn't late. That is more than a company-to-company competition. We're going to see more supply-chain-to-supply-chain competition.”
Benefits of Data Sharing across the Entire Supply Chain
An individual company can achieve high levels of customer service to its customer. However, this customer may not be the end use customer that the supply chain ultimately serves, in which case, the company may find that its success is short lived.
Company ‘A’ may be part of a supply chain (Supply Chain ‘Y’) that actually maintains higher levels of inventory across the entire supply chain to deliver the required level of customer service. A competing supply chain that does not maintain as much inventory will be more profitable and can take more market share.
Whole supply chains can become more efficient if they are able to better coordinate their operations. As supply and demand conditions change, coordination of inventory levels is critical to business success.
Companies that can work together to create efficient supply chains are going to be the ones that do the best over the long term. Companies that can figure out how to share data effectively will be the ones to create the most competitive supply chains. Customers are attracted to efficient supply chains and they gain market share at the expense of less efficient supply chains (see Exhibit 5.4).
Chapter Summary
A useful model of markets can be constructed using the basic components of supply and demand. Using these two components results in a model that defines four market quadrants:
- Developing—New markets and new products where both supply and demand are low and uncertain
- Growth—Markets where demand is higher than supply and supply is uncertain
- Steady—Established markets where supply is high and demand is high and both are stable and predictable
- Mature—Markets where supply exceeds demand and where demand can be unpredictable
The markets in each quadrant have a unique set of performance requirements that they place on their supply chains. Developing markets require performance in the areas of customer service and product development. Growth markets demand customer service above all else. Steady markets call for customer service and for internal efficiency, and mature markets require customer service, internal efficiency, and demand flexibility. In order to succeed, companies and supply chains must excel in the performance areas that are required by the markets they serve.
Customer service performance is measured by metrics such as order-and line-item fill rate, on-time delivery, and item-return rates. Internal efficiency refers to the ability of a company or supply chain to use its assets as profitably as possible. Popular measures of internal efficiency are metrics such as inventory value, inventory turns, and return on sales. Demand flexibility describes the ability of a company or supply chain to be responsive to sudden market demands for greatly increased quantities of product or for additional products outside the normal bundle of products provided. Product development measures an organization's ability to design, build, and deliver new products to serve their markets as those markets evolve over time. Performance in this area is most important in developing markets.