Designing Key Performance Indicators for Strategic Sourcing

Dr. Reddys Labs, HyderabadIntern: Sumeet Shekhar Neeraj

G I TA M S c h o o l o f I n t e r n a t i o n a l B u s i n e s s

*Project, Presentation

Under the Supervision OfIndustry Guide: University Guides:

Mr. Nihar Medh Director- Supply Chain Management

Dr. Reddy’s Laboratories, Bachupally, FTO-IIHyderabad, India.

Dr. Ch. Venkataiah&

Dr. R.VenkateswarluAsst. Director,

Professor- Statistics & Operations Research

Introduction & Profile• Industry Profile

− Highlights (Exports, Domestic)− Growth Drivers− Concerns

• Company Profile− Segments & Areas of Operation− Vision− Financials

• SCM Excellence at Dr. Reddy’s Labs. India− Sections & Sub Sections− SAP- ERP, Symphony (Inherent Simplicity)− Web ERP Interfaces (VMI)− Strategic Sourcing

2

Need for the Study• No existing system

• Quick diagnosis of variation alerts

• Indicators of functional health

• Real-time reference

• Achievements of strategic & financial ‘goals’

• Vendors not well cooperating & high vendor attrition since past 5 years (60 RM Vendors)

3

Designing KPIs for Strategic Sourcing functions

To help monitor and control their Sourcing processes & operations

To define what & when to monitor & review

To study a few metrics from the defined KPIs

Objective of the Study

4

Methodology of the Study

5

Start meeting the teams & understand

the firm’s dynamics & metrics

(Delphi methodology)

Select the most suggested metrics & weightages

indicating the performances of various roles across the team &

design a KPI model

Define the weightages and get the same approved by the

respondents & team heads

Pilot test the KPIs based on

available data/ survey results

Study & Interpret /statistically test

the model selected

Report the findings & conclude

Data Analysis & Interpretation

KPI designing results & KPIs Pilot Study

• KPI review structure:−Outcome of Survey-1: Key Metrics Survey

(Unstructured)−KPI framework designed with assigned

assessment weightages

• Pilot study of KPIs selected:− Financial data study− Survey-2: Suppliers’ Satisfaction Survey

(Structured)− Survey-3: Employees’ Internal Survey

(Structured)6

Survey-1: Key Metrics Survey• Sample: (Employees participated)

− Director (1), Associate Director (6), Managers (08), Deputy Managers (10), Jr. Managers (06), Sr. Executives (02) and various others beyond the team..

• Questions mainly asked about:− Strategic basis*− Existing system performance review process− Views on financial & non-financial metrics & targets− What metrics are of high importance & can be used− Frequency & weightage for the metrics review− Source of the suggested metrics data

• KPI framework designed with assigned assessment weightage based on the survey results

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Defined Review Levels (1-4)

Levels of review defined as under• Level 1: Buyer

­ Reviewer : Lead Buyer­ Review : Regularly/as and when required.­ Agenda : Regular issues, cross functional matters­ Daily self review before day end.

• Level 2: Lead Buyer­ Reviewer : Category Head­ Review : 2 days (alongwith other team reps if

needed)­ Agenda : Regular review of the functioning of

subordinates and health of the team functioning on daily basis

­ Supplier related issues­ Supplier relation review (once in a month)8

Defined Review Levels (1-4)• Level 3: Category Heads

­ Reviewer : Sourcing Head­ Review : Monthly­ Agenda : Review of KPI Compliances, deviations

etc.­ Review of the training needs and rewarding

decisions

• Level 4: Sourcing Head­ Reviewer : SCM Head­ Review : Monthly­ Agenda : Last month’s KPI review and next month

planning­ Cross functional meetings, MRMs, Financial targets,

Audits & other issues

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••••••••••••••••••••••••••••••••••

Survey Outcomes- Defined KPIs

Level-4 : Sourcing Head

Reviewer : SCM Head

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Sr. No.

Typology Metrics/Indicator Measure Weight

1 FinancialFinancial targets, budget deviations review, root cause analysis Viz. Inventory turnover, ROCE, Cash to cash cycle, 3PL costs etc.

Individual targets review and alignment with the firm’s strategy

10%

2 Strategic

Planning & strategizing the sourcing and procurement activities for API’s, Excipients, Packaging material, MRO & Capital purchases for the FTO & loan licensing locations.

Improvement on key matrices: % Reds & Blacks; Reduced replenishment time & Throughput Improvement

20%

3 StandardsImplementing best in class practices, technologies & robust processes within various categories.

Measure financial & business impact of tech/process improvements done

10%

4 Strategic

Timely availability of quality material at the right cost to ensure smooth product supply for product launches and routine production.

Portal reports (Availability & Lead time), product launch dates & Purchase Savings as reported by BU Finance

20%

5 FinancialPlanning & facilitating cost improvement programs (development of existing & alternate vendors) to help competitive product pricing.

Monthly financial metrics & cost improvements studied

10%

6Sustainabilit

y

Driving the implementation of organizational initiatives within internal team as well as the external suppliers.

SCRM reviews, internal employees satisfaction level

10%

7 StrategicBuilding a robust supplier base capable of meeting the qualitative as well as quantitative business outcomes of the organization.

Financial & qualitative measures reported by finance & quality teams

10%

8 ComplianceEnsure compliance with cGMP regulations, ISO, SOX, FDA & ICH guidelines.

Audit success rates 10%

InventoryPeriod

A/c Receivable

Period

InventoryPurchased

(Recd.)

InventorySold(After

Processing)

Cash Received

A/c PayablePeriod

Time

Operating Cycle

Cash Cycle

Cash Paid for

Inventory

• The operating cycle is the time period from inventory purchase until the receipt of cash.• The cash cycle is the time period from when cash is paid out, to when cash is received.

PR

to P

O

tim

e PO

rais

ed

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Level-3 : Category Head

Reviewer : Sourcing Head

Sr. No.

Typology Metrics/Indicator Measure Weight

1 Resilience

Improvement in "Business Partner Relationship Index (BPRI)" for the category handled as a part of the mission: "Together Further"- New products and existing critical products.

No. of projects achieved on time, number of cases (batches) with delayed flags

20%

2 StrategicBuild a robust team capable of delivering the expected performance sustainably.

Attrition rates, firm’s financial indicators, individual employees metrics

20%

3 Strategic

Alternate source development through a cross-functional team and continuously monitor the progress and address operational bottlenecks, & developing the existing vendors to meet the quality and supply requirements of the organization.

Monthly review of unresolved issues and vendor development programs planning and progress review

10%

4 Strategic

Improvement of the replenishment time as much as possible, ensuring availability of materials in a seamless manner, reduce PRPO time and negotiate to optimum vendor lead times helping meet the delivery programs.

Portal reports, lead time & delayed status study every month

20%

5 FinancialEnsure unbiased vendor treatment and ethical practices and procurement codes and delegation of authority codes as specified.

Approval reports & monthly purchase reports

10%

6 ResilienceEnsure buffer management based on the seasonality and demand conditions and other management plans.

Portal reports 10%

7 Strategic

Ensure team’s training needs are fulfilled. Employee internal surveys, employees’ performance assessment reports, targets achievements details

10%

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Level-2 : Lead Buyers

Reviewer : Category Heads

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Sr. No.

Typology Metrics/Indicator Measure Weight

1 ResilienceProduct tracking and expediting deliveries, negotiations with suppliers for best lead time offers

Traceability of goods at any point of time

10%

2 StrategicPRPO conversion time reduction for better throughput and turnarounds

Monthly planned production batches and achievements/ or those with delayed flags

10%

3 StrategicDaily review of the inventory levels and shortages, pending PRs to be converted to PO and POs for approval

Less than 1% blacks / Less than 5 % Reds as per symphony system

20%

4 StrategicDiscuss rejections and other anomalies occurring with the category heads and suppliers for quality improvements

Rejection rates (QA report) 10%

5 FinancialProcess/execute efficient commercial comparisons of quotes and choice of best offers across quotations

RFQs and quote comparisons 20%

6Resilience, Strategic

In terms of urgency, prove to find a viable alternative and meet target dates of projects by working closely with alternate vendors if needed

Projects/tasks completion times, vendor relationship index study

10%

7 FinancialCost reduction negotiations PO values per unit across time 5%

8 StrategicFunctional audit compliances Audit reports & occurrences of

issues10%

9 Financial CHA SLAs and delays at port/airports, incoterms study Demurrages paid (monthly) 5%

Level-1 : Buyers

Reviewer : Lead Buyers

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Sr. No.

Typology Metrics/Indicator Measure Weight

1 StrategicRRT, TAT, TPT, PRPO time reduction Portal reports 20%

2 StrategicDaily review of Symphony, RFQs, Availability of materials on time to internal customers

Monthly planned production batches and achievements/ or those with delayed flags

15%

3 Strategic

Release follow-ups and quality documentation issues handling like Deviations, documentation requirements, change controls, audit reports filing etc.

Quality reports, release lead-time reports etc.

5%

4 StrategicDiscuss rejections and other anomalies occurring with the lead buyers and suppliers for quality improvements

Rejection rates (QA report) 5%

5 FinancialProcess/execute efficient commercial comparisons of quotes and choice of best offers across quotations

RFQs and quote comparisons 10%

6Resilience, Strategic

Acquiring & analyzing market intelligence/changes to determine product availability, pricing conditions, understanding/evaluating supply-demand gaps, tracking of key indices affecting the costing.

Purchase Saving (reported by BU Finance)

10%

7 Financial

Cost reduction negotiations, rejection fate determination, salvage value improvements, cross allocation initiatives to liquidate slow moving goods

PO values per unit across time, STOs with valid use across locations

5%

8 Strategic Functional audit compliances Audit reports & occurrences of issues 10%

9 FinancialCHA SLAs and delays at port/airports, incoterms study

Demurrages paid (monthly) 5%

• Sample: (Employees participated)− Sample of 60 Suppliers in business for more

than 1 year long (of which 24 met personally for responses, 36 emailed to respond of which only 20 responded on email) out of which eventually total 44 responded ..

• Questions mainly asked about:−Comfort levels with documentation−Comfort levels with conduct and conditions−Opinions on long term relationship−Opinions on Audits conducted by the firm etc.

• Analysis by Chi Square methodology & frequency charts

Survey-2: Suppliers’ Satisfaction

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Questions Always Often Seldom Never 1) We get correctly stated terms, conditions, and requirements on a PO from Dr. Reddy's Labs.

59% 34% 7% 0%

2) We get correct timely updates on revision of specifications, revision in drawings etc. sent with the PO from Dr. Reddy's Labs.

50% 14% 27% 9%

3) POs from Dr. Reddy's Labs don’t have cumbersome and complex procedures or clauses of time, payment terms and quoting process.

45% 18% 30% 7%

4) Goods supplied against POs from Dr. Reddy's Labs are taken without issues during unloading as per incoterms.

50% 16% 25% 9%

5) Vendor knowledge upgradation and financial help is provided by the Dr. Reddy’s Labs

23% 30% 36% 11%

6) Contacting people in Dr. Reddy's Labs is easy and not bureaucratic 48% 18% 25% 9%7) Payment schedule is on or before time & payment teams stick to timelines agreed at Dr. Reddy's Labs.

57% 11% 18% 14%

8) Audits by Dr. Reddy's Labs. are fruitful and improve our standards of working.

48% 11% 27% 14%

9) If your representative visits Dr. Reddy's Labs. they are treated well and get time to meet the contact person with prior appointments.

61% 9% 23% 7%

10) Do you wish to have a long term relationship and business with Dr. Reddy's Labs. And add more value and wealth creation of the firm inline with the company

59% 11% 16% 14%

• Sample: (Employees participated)− Total 20 : Managers (Capex/MRO+RM):- 03+02, Dy.

Managers (Capex/MRO+RM):- 02+02 respectively (one who had resigned), A. M (Capex/MRO+RM):- 05+03, Jr. Managers (Capex/MRO+RM):- 03+00 respectively

• Questions mainly asked about:− Organization Design− Individual Job Characteristics− Internal & Cross Functional Work Environment− Senior Management & Direct Supervisor− Technology & Communication process− Customer Satisfaction (internal & external) etc.

• Analysis by Chi Square methodology & frequency charts

Survey-3: Employees’ Internal

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Questions Strongly disagree

DisagreeNeither

agree or Nor disagree

AgreeStrongly

agree

Our roles and responsibilities within the SCM team are explained properly to us during joining or thereafter

15% 65% 20%Clear reporting structures have been established and I am clear with my L +1's expectations 100%My skills and abilities are fully utilized in my current job 5% 15% 10% 70%I get opportunities to further develop my skills and abilities by attending SCM seminars, conferences, training and participation chances in various other learning events

5% 15% 10% 60% 10%I enjoy being a part of this SCM team 10% 30% 50% 10%Employees consult each other when they need support. e.g. within SCM team's sub divisions, with other teams like Accounts/Finance, Production, Projects, Productwise dedicated other members etc.

15% 10% 10% 45% 20%

Senior management encourages collaboration across the organization 10% 70% 20%I believe senior management appreciates the work I do 20% 70% 10%My direct supervisor gives me helpful feedback on how to be more effective. e.g. Shares standards and quality of service my employer expects from my job function

10% 10% 15% 45% 20%I believe my direct supervisor appreciates the work I do 30% 70%I am clear on how best to perform my work tasks. e.g. Benchmarks, standards, organization's and team's expectations are clear to me

100%My work group operates effectively as a unit. e.g. SCM team as a whole or sub divisions like API section, Marketwise section or Productwise section etc.

80% 20%I receive the information I need to perform my job well. e.g. Boss communicates well and I dont have to search for informations from other teams

20% 80%Interpersonal communication and relationships contribute to organizational performance 60% 40%My department has adequate tools and technologies to perform our work 80% 20%Our technology is reliable and works when we need it to work 90% 10%We understand the specific needs of our internal customers. e.g. Have been made clear about the teams/employees dependent or have direct effect on my job function

10% 10% 80%We understand the specific needs of our external customers. e.g. Suppliers, 3PL logistic service providers, CHA's, Customs deptt people, distributors, govt agencies & institutions where we supply our products etc.

25% 75%

Recommendations

• Create dashboards in SAP NetWeaver system (its feasible and in use by Peers):− Gives real time reference point− Alarms and orients the teams proceeds− Example dashboard can be replicated

• Weak CFT coordination calls defined meetings & review system (as defined in the study)

• Supplier upgradation programs & review vendor relation (study BPRI closely and devise a CAPA)

• Need for a defined review mechanism for:− Financial Indicators− Non Financial Indicators− Levelwise routine system/operation health check

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