Supply chain solutions: Measuring what matters most
Your supply chain is among your most complex—and crucial—functions. Learn how to ensure that supply chain performance supports your business goals.
In Summary
| • | To measure your supply chain effectively, identify metrics that are appropriate for your organization and that will improve business performance. |
| • | Focus on results. For example, high inventory turnover means little if customers are not getting the right orders at the right time. Make sure you can convert measurements into action. |
 | Demand forecasting is the primary reason companies invest in business intelligence. |  | | Colin Snow
Ventana Research | |
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You cannot manage what you cannot measure, and your supply chain is one of the most important functions to manage. The good news is that your supply chain people are probably already doing a lot of measuring. The bad news is that they might not be measuring the right things.
What you need are supply chain solutions and a strategic approach to supply chain monitoring—one that will align supply chain activities with overall business performance. To achieve that, you first must identify the supply chain metrics that are right for your organization. Next, establish benchmarks you can compare against, and then implement the supply chain solutions and systems that will deliver timely, reliable performance data. Finally, ensure that the data you extract from your supply chain will lead to actual improvements to your business.
Step 1: Identify the supply chain metrics that are critical for your business
The strategic supply chain metrics might not be the first measurements that spring to mind. "Most companies start with low-level metrics such as inventory turns. But that doesn't give you a clear picture of performance," says Colin Snow, vice president of supply chain performance management for Ventana Research in San Mateo, California.
Snow advises companies of any size to start with higher-level metrics that relate to business performance. He organizes these into four categories:
| • | Demand forecast accuracy. This metric measures the difference between predicted demand and actual orders. It is a leading indicator, because companies that are good at forecasting demand tend to perform well in other key areas. "Our research shows that demand forecasting is the primary reason companies invest in business intelligence," Snow reports. |
| • | Perfect order index. A "perfect" order is complete, accurate, on time and undamaged. This metric indicates how well your company is executing orders much more effectively than metrics such as fill rate can. |
| • | Cash-to-cash cycle time. Encompassing days payables outstanding and days sales outstanding, this metric measures the time between when you spend cash to buy goods or materials and when you receive payments from your customers. |
| • | Supply chain management costs. This metric looks at operating expenses associated with direct purchasing, manufacturing, warehousing, transportation and customer service. These are important measures of your internal efficiency and effectiveness. |
Of course, there are other metrics to consider. "Cycle time for new product development and introduction is increasingly important," says Michael Hugos, the author of the best-selling Essentials of Supply Chain Management, 2nd Edition (Wiley). "Also consider measuring the percentage of sales from new products."
Do not forget metrics around customer service. "Customer service has the greatest impact on your overall business performance," Hugos emphasizes. "And customers don't care about your internal efficiency. They care about your fill rates, on-time delivery, return rates—the issues that affect their performance."
Step 2: Develop and implement internal and external benchmarks
You need baselines you can compare your metrics against so that you know how you match up to competitors and whether your performance is improving or declining.
While consultancies may offer benchmarking data for considerable fees, useful information is available from more economical sources:
| • | The Supply Chain Council has developed the well-known Supply Chain Operations Reference Model (SCOR), a cross-industry standard designed to document, improve and share supply chain practices. |
| • | The American Productivity & Quality Council (APQC) has been operating a long-term research project called the Open Standards Benchmarking Collaborative. It enables participants to compare more than 100 processes across a range of industries. |
| • | The Council of Supply Chain Management Professionals offers Supply Chain Management Process Standards, a series of guidebooks that cover the core supply chain processes identified by SCOR: plan, source, make, deliver and return. In cooperation with APQC, the Council also offers no-cost online benchmarking surveys. |
Step 3: Set up business processes around supply chain monitoring
Supply chain monitoring starts not with technology but with business processes. "This is where companies go wrong," Snow says. "The technology will ensure that you monitor. But the methodology will ensure that you can take action and improve your business."
Establish processes that capture measurements throughout your operations. "You need cross-functional teams whose role it is to gather and share relevant data," says Nigel Montgomery, director of European research for AMR Research in Surrey, England. "Where companies fail is in not synchronizing performance data globally. In many organizations, different parts of the business use different systems. Understanding where that data resides is a critical success factor." This is particularly important for midsize companies, he says, which tend to manage a lot of data on decentralized desktop computers.
Then be sure that the information gets to the right people—particularly financial and operations managers who are measuring overall company performance. Be careful about prematurely escalating matters when things go wrong, however. The problem may be solvable without escalating.
"Let's say a manager sees there is not enough inventory to fill an order, so he issues a replenishment order," Montgomery suggests. "But in the meantime the customer service rep has made a substitution that met the customer's needs." Carefully defined business rules should avoid such problems, he says.
Step 4: Focus on results
Remember that just because you are measuring does not mean you are achieving results. "If you're measuring the number of units coming off the line, that might tell you your capacity rate or your fill rate," Snow observes. "But that number is meaningless if it doesn't align with corporate goals for reducing costs or increasing sales or improving customer satisfaction."
The solution can include supply chain management scorecards and dashboards. Even companies already using the SCOR model can benefit from a Balanced Scorecard approach, which Snow believes provides a better performance management framework for linking supply chain improvements to strategic goals. Balanced Scorecard enables you to track key performance indicators in product development, demand generation, customer relationship management (CRM), and other areas that directly affect the supply chain.
In fact, 75 percent of companies that have deployed scorecards and dashboards report that they are effective in improving performance, according to a February 2006 survey by Ventana Research of nearly 600 small and midsize companies.
Identifying and implementing the metrics, benchmarks and processes that enable you to transform supply chain monitoring into business improvement should be the goal of every supply chain manager. Then you will truly be measuring what matters.
 | Eric Schoeniger has 18 years of experience writing about business and information technology. Previously he was founding editor of eNT, a publication covering Microsoft technology. His work has appeared in such magazines as BusinessWeek, Chief Executive and InfoWorld. |
