Supply Chain Metrics That Matter

supply chain metrics
 

Photo credit: Celtrino.com

 

I’ll start with an admission – although I’ve spent the majority of my career as a supply chain professional, I’ve never been formally trained in the field. Like many others in the industry, I’ve had my share of on-the-job training and continuing education (APICS, for instance), but my formal schooling was in chemical engineering. So I came to the supply chain field as somewhat of an outsider – which may not have been such a bad thing. For example, my chemical engineering background helped me think about supply chains in terms of inputs and outputs, and dependent and independent variables. Perhaps because of this outsider’s perspective, I’ve never been shy about challenging the status quo, or pushing back against conventional wisdom. And one aspect of the conventional wisdom in supply chain management that has always bothered me is the framework of metrics that we use to measure, operate and improve supply chains.

I know what you’re probably thinking  – aren’t supply chain metrics pretty well established by now? Haven’t we beaten this topic to death over the last several decades talking about KPIs and balanced score cards, and adding increasing sophistication to the measurement of forecast accuracy, service level and cost? Yes, this is indeed true – over the years, much work has been done on metrics in order to define, measure, analyze, improve and control supply chains. Frameworks like SCOR have been introduced to provide a formal basis for modeling and quantifying supply chains. Armies of management consultants have come up with ways to integrate supply chain metrics into the balanced score cards that are used to run companies. Processes like Sales & Operations Planning have been designed to align supply chain performance with financial, operational and commercial performance. I have no disagreement with any of this – on the contrary, each of these developments has been beneficial in moving the field forward, and making supply chain management essential to the success of businesses of all kinds. My more fundamental, nagging issue is this: are we critically looking at the metrics we use, and asking ourselves (1) if they are the right ones for our business, and (2) if they are driving the right behaviors? And I suspect the answer to those two questions is “No,” in many cases.

Let’s go back to basics for a moment. The need for metrics is underpinned by something Lord Kelvin is purported to have said, “If you cannot measure it, you cannot improve it.” I’m paraphrasing what he said, of course, but while his basic message is simple enough, it doesn’t really tell us a whole lot about what to measure. We all know that there are measurements that unambiguously point to how we can improve things, but there are also a host of others that either offer no clue to what actions should be taken, or provide information well after the time to act has passed. And then there are others that are purely diagnostic in nature, that tell us something about the health of the system, but are not relevant to improvement, necessarily.

This is where the notion of leading, lagging and diagnostic indicators comes in, and the best way to explain it is through some examples. Let’s say we are trying to measure a student’s academic performance.  Grade point average is an obvious and important metric, but it bears noting that GPA is an output measurement, or lagging indicator. It’s a dependent variable, not one that we can directly manipulate to improve outcomes. So if we want to improve a student’s GPA, what should we measure and work on? It could be time spent in class, or in doing assignments, but more fundamentally, we need some way to measure how well the student understands the material (one could argue that this was the original intent of grades and GPA). One way to do that would be through assessments done as and when the material is being taught. When a chapter in the textbook, or a segment of the course syllabus is completed, the student takes an assessment, and the scores on the assessment provide a measure of how well the student understands the material. This metric in turn could drive improvement on the student’s path to the final grade on the subject. So a metric that measures understanding of the material is a leading indicator — an independent variable, an input that can be manipulated to drive better outcomes. Next, there are diagnostic measures – metrics that measure the health of a system, or provide a baseline for the system as a whole. For example, if a student is preparing to take the SATs, he or she might take a diagnostic practice test at the start of the process to establish a baseline and identify problem areas that require particular attention during the preparations.

Now that we have done the groundwork to understand the different types of metrics and what they are good for, where does this take us? Should we focus on leading indicators for our supply chains? Lagging indicators? Diagnostic measures? Not surprisingly, the answer is that we need all three. Output measurements are critical for any system – to understand performance, we need to measure what the system delivers. So, for a supply chain, we need lagging indicators that capture the reliability, responsiveness, cost effectiveness, efficiency and flexibility with which goods are delivered to the satisfaction of the paying customer. Many of the familiar supply chain metrics that we know and love fall into this category: forecast accuracy, perfect order, lead time, inventory turns, cost-to-serve, and return on assets. And how do we drive improvement in these output measures? As we have discussed before, we need leading indicators that we can influence before delivery happens. What metrics could help us do that? Basically those that measure how well we source, make and move products in readiness for delivery. Are suppliers delivering raw materials on time? Is capacity available to make the product when needed? Are work centers able to complete production as scheduled? The metrics that can answer these questions include actual vs target supplier lead times, plant availability, schedule adherence, and actual vs takt time. The last of these, takt time, is a metric borrowed from the world of Lean Six Sigma – it is the rate at which product needs to be manufactured in order to meet customer demand. The third and last element of the metric framework is diagnostic measurement. Again, I find myself strongly influenced by the Lean Six Sigma approach to process improvement – and from this perspective, cycle time is a particularly compelling measurement for understanding the health of a supply chain.

Now that we have our leading, lagging and diagnostic indicators, what remains is to put them together for a particular supply chain and business. Remember, we cannot drive the right behaviors and get improvement if we don’t have metrics that make sense for the business. For example, forecast accuracy at the mix level may not make sense for some products. It may be better to direct those resources towards a just-in-time operation that replenishes components to a reorder point, and assembles to order based on known (not forecasted) customer demand. Similarly, many fast-moving consumer goods operations are moving to a delivery metric based on “sell-through” rather than “sell-in” (meaning that delivery is considered complete not when the product is shipped to the retailer, but only when the product is sold off the retailer’s shelf – which is what ultimately matters).

So, there you have it – not a new set of metrics, or a new type of balanced scorecard, but rather an attitude of critical appraisal towards what is measured and why. In summary, then, here are the three main points I’m trying to make –

  1. View every metric with healthy skepticism. Focus on the ones that make sense for your supply chain and your business.
  2. Ask yourself what the metric is for, whether it’s a leading, lagging or diagnostic indicator, and what behavior it’s intended to drive.
  3. And then critically examine whether the chosen metrics in each of those three categories are meaningful in the context of making the business successful.

Because we shouldn’t forget that there is a dangerous flip side to Lord Kelvin’s maxim – if you measure the wrong thing, you won’t improve what really matters!

© Tharuvai Ramesh

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Supply chain lessons to live by

Lesson

Supply chain management, as an organized field of study, is relatively new. Depending on what key event we choose in order to peg the birth of the field, it is either about a hundred years old (dating back to the publication of the seminal book The Principles of Scientific Management by Frederick Taylor), or about thirty or so years old (when the term “supply chain management” was used in print for the very first time). Either way, we can agree that it is a young field, and perhaps because of that, supply chain management has generally valued the practitioner’s knowledge quite highly. Theory and tools are always useful, but especially in fields that have not been studied academically for very long, life in the trenches has a lot to teach us.

I have been quite fortunate in this respect – in addition to my own experiences, I had the benefit of absorbing the distilled wisdom of several mentors who were generous with their time and their knowledge. Here’s what I learned from them, on how to succeed at managing supply chains well.

Get your fingernails dirty

This may seem obvious, but if you want to learn lessons from the trenches, then spend time in the trenches. Don’t take any aspect of supply chain management for granted, whether it’s plan, source, make or deliver. While it may not be practical to spend your entire career working on every aspect of supply chain management, make hands-on learning a cornerstone of your career planning. When you visit a warehouse, don’t just admire the automated pick-and-pack system and make polite noises – be insatiably curious and find out what goes on there, day-in and day-out. When you visit a manufacturing plant, find out how goods are produced, how they are tested, and why products sometimes fail inspection. Try to understand why lead times are what they are, and what plant management is doing to make their operations predictable and efficient. You never know when some little nugget of information you pick up from touching and seeing supply chains will be critical in saving you and your company someday.

Know your supply chain

On the surface, this may seem to be a repeat of #1 above – but it’s not. This is not about learning supply chain management first-hand – it’s more about knowing every nook and cranny of your own supply chain, from one end to the other. This notion of end-to-end supply chain management is very important – many novices, and even some experts, mistake supply chain management for finished goods distribution. It’s obviously a lot more than that – all the way from the sourcing of raw materials to the production of intermediates and finished goods, to distribution, logistics, customs and regulations. The point is, if you’re accountable for delivering a product to your paying customer, you need to know every inch of the path it traverses to get there. This obviously includes the metrics that you measure supply chain performance with: lead times, capacities, inventories, costs, fulfillment rates, and cycle times to name a few. But it also includes an understanding of your constraints, vulnerabilities and strengths, as well as the people who are responsible for the product at each node along the way.

Plan well

In this results-oriented world we live in, it’s easy to fall into the trap of thinking that good execution is everything. And perhaps it is, but good execution doesn’t just happen because people are focused and do their jobs well. Good execution is a natural consequence of relentless planning, while failure is a frequent consequence of the lack of it. As Eisenhower once said, “Plans are useless, but planning is indispensable.” And in the context of supply chain management, planning means determining what should happen and when at every node of the supply chain, from end-to-end. If you just focus on finished goods distribution, without due consideration of what happens upstream, then you may be setting yourself up for a bumpy ride. Planning also means consideration of different time scales – from the longer business planning time horizon, to the much shorter time periods associated with production plans for the manufacturing floor. As the time horizon becomes longer, the level of detail in the corresponding plan and the frequency of the planning activity both diminish.

All this may seem like an awful lot of work, especially when the plans themselves often bear little resemblance to reality due to changes in the assumptions or the environment. But believe me, the alternative is much worse. You will either end up working twice as hard to react on the fly, or not having any work at all by virtue of having been fired from your job. And finally, planning well means using the right tools. Depending on the size and complexity of your supply chain, make sure you have the horse power to get it right. If you have an Enterprise Resource Planning (ERP) system, leverage it to the hilt. If you don’t have an ERP system, lobby vigorously to at least get the planning tools you need, and deploy them so that their use becomes a part of daily life in your supply chain.

We live in an information rich universe, where we are bombarded every day with news of the latest innovations and techniques for improving supply chain performance, whether it’s demand-driven networks, lean supply chains or advanced planning tools. But in the midst of all that, we shouldn’t forget the basics that provide the foundation for making the improvements possible. And there’s no better way of reminding us of the basics than some lessons from the trenches.

© Tharuvai Ramesh