applying business metrics for value chain part 1

Applying Business Metrics for Value Chain / Supply Chain Operations: A

Tutorial (Part 1)

Scott StephensBusiness Forerunners, Inc.

http://measuredperformance.blogspot.com

http://measuredperformance.blogspot.com/

Supply Chain OperationsCheaperFasterBetter

• Finance is “true north”• Business performance may be driven by counter-intuitive

solutions• Metrics, intelligently utilized, can align business performance

to financial objectives



Overview

• Definitions• Employing Metrics – Goals, Objectives, and Issues• Linking Strategy to Results

• Performance Measures• Level 1, 2, & Metrics



Definitions: Metrics, Key Performance Indicators, and Measurement

• Metrics – “a standard of measurement”– Inches, feet, meters– Value of finished good inventory– Order Fulfillment Cycle Time

• Key Performance Indicator – a metric that has been chosen to be pivotal in understanding past, present or future business performance– Braking Distance– Asset Turns– Order Fulfillment Cycle Time

• Measurement – the value derived from applying a metric– Braking Distance of a car traveling at 50mph is 82 feet– Finished Goods Inventory Turns 23 times per year – Order Fulfillment Cycle Time is 4 days



Metric / Management Goals• You cannot manage what you do not measure

– Measurements provide an objective yardstick for management, operations, and improvements

• Not all measurements are equally important• There are more opportunities to measure and collect data than can or

should be pursued– Most companies do not fail to collect information – they collect too much and

do too little with the meaningful data they have• Measurement can be expensive

– Instrumenting supply chain operations– Data management - Data Management - Data Management

• Conflicting measurements produce barriers to effective operations– Same term being used to describe two different measurements– Dissimilar measures being applied to assess similar activities

• Point measures can produce misleading results



Objectives• Metrics provide a basis for strategic planning

– Sales and operations planning– Business area investments

• Metrics provide a basis for negotiating acquisition (supplier) and delivery (customer) agreements

• Metrics provide a bases for establishing operational goals and managing to achieve those goals

• Metrics provide a basis for identifying supply chain improvement opportunities, prioritizing investments, and determining Return on Investment


• Metrics are the most explosive subject in supply chain Metrics are the most explosive subject in supply chain managementmanagement– Different constituencies have investments in their “key Different constituencies have investments in their “key

performance indicators” and definitionsperformance indicators” and definitions– Compensation is frequently tied to established metricsCompensation is frequently tied to established metrics

• Metrics provide the greatest “lever” for operational and Metrics provide the greatest “lever” for operational and cultural changecultural change


Supply Chain Operations Reference Model (SCOR)

• SCOR Model, while best known as a business process modeling framework, also addresses metrics

• Metrics hierarchy that is aligned with business processes– Over 300 defined metrics– Measurement boundaries identified– Metric hierarchies support strategy, planning, operations, and improvement

activities• Six Sigma• Lean

• Common definitions– Definitions constructed to drive financial performance– Definitions constructed to be used by cross-enterprise stakeholders– Definitions constructed to be acceptable to cross-functional stakeholders

• DCOR / CCOR Metrics which are designed to be similar and related are less mature


Value Reference Model (VRM)

• VRM Model, like the SCOR Model, while best known as a business process modeling framework, also addresses metrics

• Metrics, like the processes, are designed to integrate product development, raw material acquisition, manufacturing / production, distribution, marketing, sales and service

• Metrics hierarchy that is aligned with business processes– Over 300 defined metrics– Measurement boundaries identified– Metric hierarchies support strategy, planning, operations, and improvement

activities• Six Sigma• Lean

• Published as Value Cards• Common definitions

– Definitions constructed to drive financial performance– Definitions constructed to be used by cross-enterprise stakeholders– Definitions constructed to be acceptable to cross-functional stakeholders


Model Metrics – Pros and Cons

• Pro – Metric definitions extracted from member companies (not a theoretical exercise)

• Pro – Metric definitions, the metric framework, and their use tested– Multiple Industries– Multiple Disciplines– Multiple case studies (with proven success as measured in $$$)

• Pro – Metric definitions are maintained in a “neutral” respository (independent trade organization)

• Con – Definitions are not-tailored to specific company or company applications (and existing / competing definitions in place)

• Con – Metric definitions are in a continuous state of improvement– Shortcoming in retail (particularly as it relates to merchandising)– Shortcoming in service industries (manpower metrics)

• Con – Metric structure and hierarchy are not explicit


Using the Metrics• Establish goals

– 5 (five) dimensions of product line performance– Varies by product family, product line, customer, geography

• Identify top level metrics– Measure actual performance– Determine desired performance

• Identify lower level metrics drivers– Instrument the across the product line (internal and external)– Determine diagnostic metrics for in-depth analysis– Measure actual performance– Determine desired performance– Execute change

• Instrument supply chain for exception monitoring– “Routine” measurement– Identify out-of-limits performance


The “goodness” of operations – establishing goals – top level metrics


• Positioning – how successfully do you generate demand, recognize demand, shape demand– Market share– Forecast accuracy

• Availability – how well do you satisfy demand• Revenue driver (Lost and future sales)

– Velocity (Speed) – how quickly can you satisfy demand• Time to market, Time to Volume

– Reliability (– how well do you meet your commitment to the customer• Flexibility – how well can you react to abnormal (unplanned) changes in demand or market

conditions– Enables revenue– Mitigates inventory risk– Incurs cost which may not be recovered

• Cost – how much do you pay for operations– Drives cost and margin– Enables revenue (potentially lower price point)

• Asset Utilization – how effectively do you utilize your assets (fixed and working capital)– Drives margin– Drives cash flow and Return on Assets– Earnings

Strategy Drives Objectives and Metric Goals

Flexibility

Availability

Position

Cost

Assets

Product Introduction – Early AdoptersProduct Introduction – Early Adopters

Flexibility

Availability

Position

Cost

Assets

Mature Product – “Cash Cow”Mature Product – “Cash Cow”

Flexibility

Availability

Position

Cost

Assets

Mature Product – End of LifeMature Product – End of Life

Flexibility

Availability

Position

Cost

Assets

New Product – Market ShareNew Product – Market Share


Tools


• Software providers are increasingly supporting use of the metrics in conjunction with business processes (and without)– SAP– Gensym– Xelocity– Business Objects– SAS– MetaStorm– IDS Scheer

• Executive dashboards

applying business metrics for value chain part 1

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