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PERFORMANCE
METRICS
Drive Supply Chain
Excellence Through
By Yatish Desai
To transform supply chain effectiveness,
performance measurement must be a
focus of continuous improvement.
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DECEMBER 2011 | JANUARY 2012 [ 36]
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However, many forward-looking
companies are now evaluating their
supply chain organizations based on value
creation from revenue generation to
brand equity enhancement and not
just cost reduction. Instead of discrete
functions, the supply chain is seen as a
fexible, integrated set of cross-functional
processes and roles that involve planning,
sourcing, making and delivering, as well
as ensuring customer service, quality and
successful new product launches.
As a result, supply management pro-
fessionals can actively design structures,
systems, processes and methodologies to
respond to changing requirements. They
can also replicate, scale and continually
build on best practices in a sustainable
way moving beyond one-time suc-
cesses while supporting the long-term
strategic goals of the organization. As
market complexities and dynamics con-
tinue to increase, these enhanced new
metrics are needed to support continuous
supply chain transformation.
By using updated metrics, supply man-
agers can fnd new ways of looking at the
same information theyve been tracking
for years to develop a more meaningful
measurement of supply chain performance
that includes a broader understanding of
business and fnancial implications.
Moving Toward Efcient and
Effective Supply Chains
Performance metrics supporting supply
chain performance can help organizations
better adapt to changing business conditions,
meet their strategic goals, help ensure stake-
holder satisfaction and build the business
according to plan. A sustainable transforma-
tion program starts with a leader working
with the team to understand the various
factors that lead to strong performance in
the supply chain. Supply management teams
must identify the hallmarks of their own
supply chains to make them more efective.
The frst step in driving a sustainable
transformation program is making a dis-
tinction between supply chain efciency
and efectiveness. Supply chain efciency
can be defned as the comparison of what
is actually produced or performed against
what can be achieved with the same con-
sumption of resources such as money, time
and labor. Efciency is focused on doing
things better in the current state with
greater emphasis on tactical work. As such,
efciency is an important factor in mea-
suring productivity.
For example, consider a labor workforce
that manufactures 70 widgets per hour
versus a standard target of 100 widgets per
hour. Because the labor workforce is only 70
percent productive, there are opportunities
to increase labor efciency through methods
such as better training or automation. In
another example, an employee is paid to
work eight hours per day, but only works
six hours per day once meetings and lunch
breaks are removed from the total. To
improve employee work efciency, the com-
pany might consider ways to reduce the time
involved in meetings and/or alternatively
reduce the duration of the lunch break.
Supply chain efectiveness is the degree in
which objectives are achieved and the extent
to which targeted problems are solved. In
contrast with efciency, efectiveness is
determined by what is needed strategically
to change or transform the current state.
In short, efciency means doing the thing
right, and efectiveness means doing the
right thing. More specifcally, efective-
ness means that an organization is able to
meet objectives and satisfy stakeholders and
customers by managing its supply chain
in an agile manner. Thus, the focus is on
how something is done rather than which
employees are handling each task.
This distinction between efciency and
efectiveness can, in turn, be used to develop
a three-stage continuum to achieving supply
chain improvement and transformation, as
illustrated on page 39.
Elemental.
In the elemental
stage, the
supply chain
stabilizes the
fow of goods
required by
the com-
pany. Basic,
The rst step in driving a sustainable transformation program is making a
distinction between supply chain efciency and effectiveness.
S
upply chain organizations have traditionally used performance measurements to
help demonstrate and improve the value a department or employee delivers to the
organization. This view of performance measurement is often based on the tradi-
tional image of the supply chain as a delivery system limited to discrete functions,
such as materials management, logistics, procurement and manufacturing. Accordingly, cost
and its related issues are usually the focus of most performance management metrics.
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DECEMBER 2011 | JANUARY 2012 www. i sm.ws [ 38]
foundational elements with essential pro-
cesses are in place, but they might operate
in functional silos with a minimal level
of integration across the organization.
Rationalization of business plans is tactical
rather than strategic in nature, and the
supply chain tends to work in a reactive or
frefghting mode. From the talent stand-
point, there is often an overreliance on
tribal knowledge and poor planning, and
execution typically leads to waste.
Efcient. At the efcient stage, the
supply chain moves from stabilization to
optimization. This involves minimizing
operating costs and employed assets, sup-
porting compliance and attempting to gain
competitive advantage through operational
productivity and proftability. However,
the supply chain is still hampered by
inconsistent and nonstandard processes for
performing business functions, as well as
poor control and management oversight
across the supply chain. Transactional,
material, informational and fnancial
activities across core processes need to
be dramatically improved.
Efective. The efective stage is
characterized by a fundamental, end-to-
end transformation of the supply chain.
Organizations now focus on high-quality,
cost-efective, proftable supply chain per-
formance, not mere compliance. They also
identify and exploit value creation through
economies of scale and innovative oper-
ating models.
At this stage, the supply chain is incor-
porated into the organizations business
strategies. Traditional silos of processes
and knowledge are broken down, and
both staf and supply managers can col-
laborate across functions to support the
integrated operating business model of
the organization, extending the reach
to trading partners such as suppliers,
contracted manufacturers and channel
distributors.
Key Metrics
Each stage of supply chain development
has distinctly diferent metrics for perfor-
mance management.
Metrics at the elemental stage are cen-
tered on costs specifc to each function.
Examples include:
Manufacturing (unit cost, labor cost and
plant utilization)
Sales and marketing (market share and
revenue growth)
Engineering and R&D (labor and mate-
rials cost, change management cost and
time to launch).
Efciency metrics are broader in scope
but are not linked to fnancial key perfor-
mance indicators (KPIs) or the strategic
objectives of the organization. Examples
include:
Headcount (salaried, waged and
contracted)
Indirect spend
Facilities and asset cost management
Cost of quality
Tax efective rates for supply chain
Continuous improvement
program spend.
Efectiveness metrics represent a
quantum leap in integration, visibility and
alignment with overall supply chain per-
formance. In the efective stage, the focus
shifts from discrete functions to integrated
processes. Metrics are multidimensional
and span the entire supply chain, including
suppliers and customers. Metrics are also
aligned with the companys business
model, business plan and overall objec-
tives. They cascade from organizational
performance, to departmental perfor-
mance, to individual performance. In
addition, they are linked to fnancial KPIs.
Based on these metrics, supply managers
can develop an integrated, single view of
supply chain performance across functions
and hierarchies. They can map processes and
roles in the supply chain to key metrics and
align metrics with fnancial performance.
With mechanisms in place to periodically
review actual supply chain performance,
measures can be redefned in light of
changing business goals and requirements.
Efectiveness metrics involve areas
such as services, assets and speed/velocity,
with each of these areas related to the
others across the supply chain. Examples
of services-based metrics include:
Lead time reduction and reliability
Perfect order fulfllment
Customer satisfaction
Supplier collaboration.
Examples of asset-based metrics include:
Return on supply chain fxed assets (net
income/total assets)
Asset utilization (capacity and space
utilization)
Revenue on operating assets
Total supply chain costs.
Examples of speed/velocity
performance include:
Inventory turn increase (COGS/
inventory)
New product development cycle time
reduction (ROI on NPD)
Effectiveness metrics involve areas such as services, assets and speed/velocity,
with each of these areas related to the others across the supply chain.
PERFORMANCE
METRICS
Drive Supply Chain
Excellence Through
www. i sm.ws [ 39] DECEMBER 2011 | JANUARY 2012 INSIDE SUPPLY MANAGEMENT
Elemental
Stabilize
Efcient
Optimize
Effective
Transform
This illustration details the three-stage continuum to achieving supply chain improvement and transformation.
Integrated Performance Measurement Stages
Capacity ramp-up
Demand forecast accuracy.
Development and transition to an efec-
tive operating model requires building new
organizational capabilities to support the
strategic objectives. One of the key con-
stituents of this model is having the right
talent pool with the right skill sets to handle
the challenges inherent in the transforma-
tion process. In addition, the communica-
tion of performance management systems
both internally and externally is also
vital and should be a key part of organiza-
tional culture. Performance management
should be geared toward talent retention
and development that includes technical and
business-level skills, especially when respon-
sibilities break down to include business
decision-making.
For supply management professionals
in particular, the focus should be on striking a
balance between quantitative metrics such as
forecast accuracy and on-time in-full (OTIF)
delivery, and qualitative metrics involving
change management, project management,
technology enablement and governance.
Benets for Organizations
With performance metrics supporting
efectiveness, organizations can eliminate
functional silos and create results-oriented,
multifunctional teams. Employee produc-
tivity may increase when individuals are
able to make informed decisions based on
root cause analysis and factual accurate data.
In the same way, supply managers
can quickly determine the root causes
of supply chain failures to help identify
and implement required changes. Supply
managers can also improve their under-
standing of how activities at multiple
tiers are related and collaborate with
each other. For both supply managers
and staf, feedback mechanisms can help
increase understanding and commitment
to strategic goals, helping recognize the
importance of each individuals role in
the wider context of the supply chain and
the organization as a whole.
Transforming the supply chain based on
efectiveness involves a paradigm shift for
organizations and cannot be accomplished
overnight or without support from the top.
However, it can represent a true value dif-
ferentiator for companies, which can be
critical in todays environment. ISM
Yatish Desai is a director in KPMG Advisorys Business Effectiveness Group
in Cleveland. For more information, send an email to author@ism.ws.
Industry laggard and risk-averse
Focus on getting out of reghting mode
Unstable and unaligned processes and
operating infrastructure
Value lock-up
Integrated Performance Measurement Low High
V
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l
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e

C
r
e
a
t
i
o
n
L
o
w
H
i
g
h
Typically industry follower
Focus on functional compliance
and value optimization
Minimize operating costs and
employee assets
Industry leader
Focus on high-quality, cost-effective,
protable supply chain performance
Exploits value through economies of scale
Integrated and novel operating model
Value accelerator
Institute for Supply Management

. All rights reserved. Reprinted with permission from the publisher, the Institute for Supply Management