Supply Chain Performance

Measurement:

Trends and Transformations

Steven A. Melnyk

• Professor of Operations & Supply Chain Management Department of Supply Chain Management Eli Broad Graduate School of Business Michigan State University East Lansing, MI 48824-1122 USA

• +15174326410

• melnyk@msu.edu

Introduction

Understanding performance

measurement

Introduction – understanding performance measurement

Performance Measurement

• Critical

• Confusing

• Changing

Making Sense of Measurement

•Basics

•Roles Critical

•Challenges

•Myths Confusing

•New Roles

•Guidelines Changing

How well do you know performance measurement?

Q1: Which is more important?

• Strategy?

• Performance measurement?

Answer

• Strategy, while setting the overall direction of the firm, is often vague and meaningless to most people.

• Measurements convert strategy and the business model into actions that they have to take; measurements makes strategy concrete!

Measurement starts with the business model

Value

The Flow

• Who is our key customer(s)?

• What is our value proposition?

• What does the customer value? – Order qualifiers – Order winners – Order losers

• What is the Desired Outcome?

• These determine how frequency of measurement!

The Importance of Measurement

• One of the most powerful management disciplines, the one that more than any other keeps people focused and pulling in the same direction, is to make an organization’s purposes tangible. Managers do this by translating the organization’s mission – what it, particularly, exists to do – into a set of goals and performance measures that make success concrete for everyone. This is the real bottom line for every organization – whether it’s a business or a school or a hospital. Its executives must answer the question, “Given our mission, how is our performance going to be defined?”

– Magretta & Stone, Management. 2002, p. 129

Q2: The Primary goal of Performance Measurement

• Monitor and control • Communicate

Performance Measurement - Goal

• Communicate – Goals – Expectations – Consequences

• Sell – Get commitments

• Educate – What is important – What is not important

• Direct – To gaps

• Measure/Correct

Q3: We should use the same measures throughout the firm?

• True? • False?

360 Leadership Model

self

Superiors

Subordinates

Upstream Downstream

How do we communicate?

• Top management

– Output measures (after the fact) • Sales

• Market share

• Quality problems reported

– Why? • Get their support

• Resources

• Time

How do we communicate?

• To our subordinates/suppliers

• Output measures are useless except as score keeping.

• Need predictive or process measures – Measures associated with the process

– Identifies process attributes that we should manage to achieve the desired outcome(s)!

Process Measures Example

Lead times

• Our goal is to reduce lead times, what aspects of the process are suitable for being process measures?

• Answer

– Number of steps in the process

– Distance covered

– Number of people who touch the order

– Setup times

360 Leadership Model

self

Superiors

Subordinates

Upstream Downstream

Q4: Measures and metrics mean the same thing?

• True? • False?

Measures versus Metrics

• A measure is a verifiable indictor stated in quantitative

(e.g., 95% inventory accuracy) terms and intended to

close the gap between value, strategy, and specific

activities.

• Objectives

– Measure

– Teach

Metrics are different

Metrics bring 3 elements together

Metrics

Measure

Consequence Standard

Some thoughts

• A metric without a standard is meaningless!

• A metric with the wrong standard is dangerous!

Q5: When it comes to measures, the more the better?

• True? • False?

The Goldilock’s Principle

• Measures are best if:

– There are not too few • Over-focus

– There are not too many • Confusion

• Gamesmanship

• Focus on what you can do well

Then what is just right?

• For decision-makers:

– 5 +/- 2 has been found to be about right!

Implications

• If you want to introduce a new measure or metric and you are at 7 something has to go!

• Measure what you need, not what you can.

• Avoid conflicts in measurement systems. – The lesson of a cereal company

• Measures have life cycles.

• Beware bad data!

Q6: Measures are accurate indicators of performance?

• True? • False?

Truth of Measures

• Measures are often imperfect proxies for performance and desired outcomes.

• Just because the numbers look right, don’t assume that the desired changes are taking place.

– A pharma story

– A company tries to change its strategy from lean to innovation.

• Measures are subject to the telephone game effect.

Q7: Measurement problems indicate problems in performance?

• True? • False?

It depends!

Word of Mouth Communications Requirements Past Experience

Expectations

Perceived

Performance

Actual

Performance

Performance

Standards

Management

Perceptions of

Expectations

External

Communications

Gap 2

Gap 3

Gap 5 Gap 4

Gap 6

Cust

om

er

Sel

ler

Gap 1

Opportunities for Errors

The Advent of Forwardcasting!

• If you focus on the past, then the measures ultimately become punitive! – The past is done, move on!

• New approach – Measures describe future goals

– Periodically, we compare actual progress with desired progress

• If on track, keep going

• If off track, why? What can be done to reorient activities to achieve future goals.

Q9: Within the supply chain, measures should be aligned?

• True? • False?

Through Whose Eyes Do We See the World

Through our own! Through our customers’

Measurement starts with the business model

Value

Making Sense of Measurement

•Basics

•Roles Critical

•Challenges

•Myths Confusing

•New Roles

•Guidelines Changing

Final Comments

Concluding Comments

Final Comments

Comments

• Measures and metrics are: – Critical – Confusing – Changing

• Increasingly important

• New insights require new approaches

• Developing measures is a key skill of the strategic supply chain manager.

The Three Laws of Metrics

• Management has a desired to

measure quantitatively everything.

• Every metric will generate under

desired or unexpected

behavior/results.

• There should be balance

– Long term vs. short term

– Making money now vs. investing in the

future

– Outcomes vs. processes.

Questions