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Overview of the use of metrics to improve supply chain and value chain performance - Part 1, Selecting detail metrics and how to drive financial performance is in Part 2
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Applying Business Metrics for Value Chain / Supply Chain Operations: A
Tutorial (Part 1)
Scott StephensBusiness Forerunners, Inc.
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
http://measuredperformance.blogspot.com
Overview
• Definitions• Employing Metrics – Goals, Objectives, and Issues• Linking Strategy to Results
• Performance Measures• Level 1, 2, & Metrics
http://measuredperformance.blogspot.com
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
http://measuredperformance.blogspot.com
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
http://measuredperformance.blogspot.com
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
http://measuredperformance.blogspot.com
• 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
http://measuredperformance.blogspot.com
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
http://measuredperformance.blogspot.com
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
http://measuredperformance.blogspot.com
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
http://measuredperformance.blogspot.com
The “goodness” of operations – establishing goals – top level metrics
http://measuredperformance.blogspot.com
• 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
http://measuredperformance.blogspot.com
Tools
http://measuredperformance.blogspot.com
• 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
http://measuredperformance.blogspot.com
http://measuredperformance.blogspot.com