Transcript Harnessing the Power of Supply Chain Metrics”

“Harnessing the Power of
Supply Chain Metrics”
Alan L. Milliken CFPIM CIRM CSCP
BASF Corporation
Presented to: West Coast Florida Chapter of APICS
February 12, 2008
Advancing Productivity, Innovation, and Competitive Success
Alan L. Milliken CFPIM CIRM CSCP
• 20+ years at major manufacturing sites working in Production, Logistics,
Process & Quality Control, Industrial Engineering, Training, and Scheduling
• 12+ years as a Supply Chain Consultant and APICS Instructor including
two years in Mexico City helping BASF Mexicana improve their supply chain.
While there, taught Operations Management as guest professor at University
of Panamericana in Mexico City.
• Identified by an independent consulting firm as one of three APICS
members who best answer the question, “What is a Supply Chain Manager?”
• Served as an SME (Subject Matter Expert) on the team that developed the
new Certified Supply Chain Professional (CSCP) program.
• Served as an SME on the team that developed the new Certified Forecasting
Professional (CFP) for the Institute of Business Forecasting (IBF)
• Engineering Degree from Auburn University and MBA from Clemson
University
Advancing Productivity, Innovation, and Competitive Success
The world’s leading chemical company with revenues of approximately
$70,000,000,000 USD in 2007.
BASF Sales & Earnings
60,000
50,000
M Euros
40,000
30,000
20,000
10,000
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year
Sales
Income from operations (EBIT)
Advancing Productivity, Innovation, and Competitive Success
BASF – 5-Year Stock Performance
(PPS in USD)
At BASF, “We don’t make a lot of the products you buy, we
make a lot of the products you buy better.”
Advancing Productivity, Innovation, and Competitive Success
Aligning Supply Chain Metrics
with Corporate Strategies and
Competitive Priorities
If you don’t know where you are going, everyway
is the wrong way.
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Value-Based Management Approach
The company’s definition of success will define the
contents of the performance management system.
Advancing Productivity, Innovation, and Competitive Success
BASF’s Value-based Management
Shareholders receive
high ROI
3. Create Value for our
Shareholders
Shareholders provide
capital
1. Invest in making our
Customers better
BASF
2. Deliver Value to our
Customers
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Value-Based Management Concept
Value can be created by:
Profit
increasing Profit
and/or
reducing capital employed
(e.g., inventories, receivables)
Reducing
capital
employed
Source: Kurt Bock – Chief Financial Officer – BASF Group
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Who in the Organization Can Create Value?
All employees can create value by optimizing the value
drivers in their day-to-day business, e.g., by:
increasing sales through higher prices and/or sales
volumes
reducing costs
optimizing inventories and receivables
using production plants optimally
Source: Kurt Bock – Chief Financial Officer – BASF Group
Advancing Productivity, Innovation, and Competitive Success
Value Creation Driver Tree
The firm must link Supply Chain Value Drivers to Financial Performance
Value Drivers
+
Sales
revenue
-
Variable
costs
-
Fixed
costs
Profit
EVA after
costs of
capital
Costs of X%
capital
Working
capital
Fixed
assets
 Pricing
 Innovation
 Product mix
(product and
 Delivery Performance business models)
 Variable
 Shipping costs
manufacturing costs  Packaging costs
 Raw materials costs  Transport costs
 Fixed
manufacturing costs
 Process innovation
 Inventories
 Receivables
 Forecast reliability
 Payment terms/
dunning
 New investments
 Investments in expansions
 De-bottlenecking
Source: Kurt Bock – Chief Financial Officer – BASF Group
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Example: Supply Chain/Marketing & Sales
Case study from a BASF business unit
Profit
Sustainable reduction
in current assets
Sales
revenue by $120m (= ca. 25%)
Variable
costs
EVA after
costs of
capital
 Streamlining of product range
 Forecast reliability
Fixed
costs
 Batch size optimization
 Simplification of global
Costs of
capital
Working
capital
Fixed
assets
warehouse structures
 Shorter payment terms
 Improved Inventory Control
Source: Kurt Bock – Chief Financial Officer – BASF Group
Advancing Productivity, Innovation, and Competitive Success
Where does Supply Chain Capability Fit
in the Planning & Execution Model?
Market & External
Environment Analyses
Link Corporate and
Supply Chain
Strategies
Corporate
Strategy
Competitive
Priorities(Cost,
Quality, Time,
Price, etc..)
Future Direction
(Global Strategy,
New Products &
Services, etc…)
Functional Area Strategies
Finance
Marketing
Supply Chain
others
Identification of Customers, Products,
Competition, Socioeconomic Environment
Overall missions & goals of the Organization,
Recognition of Distinctive Competencies.
The strategy of the
corporation and
associated supply
chain needs drive
the Performance
Management
process.
Key Performance
Indicators
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Source: Operations Management, Fifth Edition, Krajewski & Ritzman
The Roles of Supply Chain
Metrics
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The Power of Measurements
Before Measurement
After Measurement
Metrics
Unconsciously
Incompetent
“Sometimes, you don’t know
what you don’t know.”
Donald Rumsfield – Former
Secretary of Defense
New metrics lead to
new questions which
create new vision.
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Performance Measurement
Techniques for measuring performance are called “metrics.” The objective
of Performance Measurement is to help the firm develop and maintain a
competitive advantage based on adding value to products and enhancing
customer satisfaction.
• Performance describes • Measurement implies
what a product or
some kind of
service does or doesn’t
qualitative or
do to meet or exceed
quantitative method
the customer’s needs.
for determining if the
performance is
progressing toward the
goal.
Metrics can be categorized as Cost-Based, Quality-Based, or Time-Based. A key
to meeting objectives is a comprehensive and balanced set of metrics.
For example, % Prime Quality (Quality), Inventory Investment (Cost), and
Delivery Speed (Time)
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The Closed-Loop Measurement System
PLAN
Strategy
DO
Action
RE-DO
CHECK
Measurement
If the results are different than planned, the Strategy, Action, or Measure must be revised.
Advancing Productivity, Innovation, and Competitive Success
Role of Performance Metrics
• provide a quantified definition of what is important and
how the organization is performing.
• ensure alignment between strategical, tactical, and
operational goals & objectives.
• facilitate a cross-functional view of relative importance
among individual, team, and functional goals &
objectives.
• motivate the organization towards continuous
improvement.
• provide a means to link individual and organization
performance to reward systems.
Advancing Productivity, Innovation, and Competitive Success
Balanced Scorecard Approach
Performance Measurement must take into consideration four perspectives:
“How do we look
to shareholders?”
Financial
Perspective
•Contribution Margin
•Cash Flow
•Operating Result
•Return on Assets
•Days Sales Outstanding
•Value-Added Productivity
Customer
Perspective
•Promise vs. Request Date
•Promise vs. Delivery Date
•Request vs. Order Date
•Order vs. Delivery Date
•Actual vs. Plan Ship Date
•Ship vs. Order Quantity
“How do we look to
our customers?”
Internal
Perspective
•Forecast vs. Actual Sales
•Actual vs. Plan Production
•Inventory Velocity
•Non-Optimal Shipments
•Distribution Expenses
•Flexibility & response time
Innovative
Perspective
•Trends in performance
•Rates of improvement
•Learn new processes
•Learn new technologies
•Share knowledge
Source: “The Balanced Scorecard” by Norton & Kaplan
“At what
must we
excel?”
“Can we continue to
innovate and improve?”
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SCOR Model Relates Metrics to Cross-Functional Processes
Strategy: Make-to-Stock Competitive Priority: Delivery Reliability
• FCST Accuracy
• FG’s Inventory
PLAN
SOURCE
Purchasing
• Supplier OTD
• Supplier Fill Rate
MAKE
Manufacturing
• Prod. Plan
Adherence
• Quality-Yield
Performance
Source: Supply Chain Council
DELIVER
Logistics
• On-Time Delivery
• Fill Rates
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Alignment of Metrics
Level 1:
Basis of
Competition
(e.g. Return on
Assets)
Level 2: Overall Process
Category (e.g. Inventory
Investment)
In addition to
balancing metrics
across multiple
perspectives, the
organization must
align goals &
objectives vertically.
Level 3: Process Level
Metrics (e.g. Finished
Goods Inventory)
Note: Visit www.supply-chain.org for more information on the SCOR Model and aligning metrics.
Advancing Productivity, Innovation, and Competitive Success
Aligning Supply Chain Metrics with
Corporate & Operations Strategies:
Operations Strategy:
(A)Make-to-Order or
Customized Service
(B) Make-to-Stock or
Standard Service
Competitive Priorities:
___Delivery Speed ___Customization ___Low Cost ___On-Time Delivery
___Flexibility ___Consistent Quality
Profit Margins:
___Higher ___Lower
Supply Chain Design:
___Efficient ___ Responsive
SC Design Features:
___Flex or Intermediate Flows ___Line Flows ___High Capacity Cushion
___ Low Capacity Cushion ___High Inventory ___Low Inventory
___Minimize Lead Time ___Minimize Cost
Key SC Metrics:
___Order Fulfillment Time ___SCM Costs ___Upside SC Flexibility
___On-Time Delivery ___New Product Lead Time ___Inventory Investment
Advancing Productivity, Innovation, and Competitive Success
Aligning Supply Chain Metrics with
Corporate & Operations Strategies:
Operations Strategy:
(A)Make-to-Order
Customized Service
(B)Make-to-Stock
Standard Service
Competitive Priorities:
Delivery Speed
Customization
Flexibility
Low Cost
On-Time Delivery
Consistent Quality
Profit Margins:
Higher
Lower
Supply Chain Design:
Responsive
Efficient
SC Design Features:
Flex or Intermediate Flows Line Flows
High Capacity Cushion
Low Capacity Cushion
High Inventory
Low Inventory
Minimize Lead Time
Minimize Cost
Key SC Metrics:
Order Fulfillment Time
Upside SC Flexibility
New Product Lead Time
SCM Costs
On-Time Delivery
Inventory Investment
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Designing and Implementing
KPI’s
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An effective KPI effort includes two critical
phases: Design and Implementation.
Active Communication Plan
Throughout the Phase
I. Design
Understand
business strategy
& goals
Kick-off KPI
Project
II. Implementation
Implement
Be
To-
KPI Education &
review of
available tools
Assess Existing
KPI’s
Develop To-Be KPI’s
Proactive Efforts to
“Teach” the Processes to
the business
Evaluate &
understand
performance
gaps
Monitor “Live”
process
Develop plan for
continuous
improvement
Identify lessons
learned/facilitation
improvement
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The KPI Team Mission: Develop and implement a “Scorecard”
to monitor and improve overall business performance.
KPI Team
Team Objectives
Sponsor: Controller
• Determine performance metrics for the NAFTA
Business
Manufacturing
• Establish data collection and reporting processes
Finance
IT
Human Resources
• Establish detail profiles for each metric
Leader
Facilitator
R&D/Engineering
• Develop a target setting process including
tolerances
Purchasing
• Implement corrective action/decision making
process
• Establish clear roles & responsibilities
Mktg./Sales
Logistics
• Develop process to reconcile metrics across
levels of the organization, sites, & functions
• Provide training and documentation
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Develop a High-Level Project Plan
- Estimated Project Timing Month 1
Month 2
Month 3
Month 4
Approach Tasks

Scope and Organize Project

Conduct Kick -off Meetings

Perform Metric Education

Assess Existing Metrics

Develop Balanced SCORcard

Develop & Document KPI’s

I. D. Roles & Responsibilities

Establish Targets & Tolerances

Incorporate into Bus. Processes
Project Update Meetings:
“Take care to get what you like, or you will be forced to like what you get.”
George Bernard Shaw
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Identify and Assess Current Metrics
• Is the metric SMART? (Specific, Measurable,
Actionable, Relevant, Timely)
• Is the metric part of a balanced approach?
• Does the metric support strategic and tactical level
goals & objectives?
• Does the metric provide benefit to the organization
(motivates behavior, serves as focal point for
improvement, highlights performance to better
practices, etc...)
It is not only important to “measure things right” but also to “measure the right
things.” old axiom
Advancing Productivity, Innovation, and Competitive Success
Design a Business Level Balanced Scorecard
Generate a list for review, discussion, and decision making:
SCOR
Category
Balanced
Scorecard
Perspective
Deliver Reliability Customer
SCOR
Category
Balanced
Scorecard
Perspective
On-Time Delivery
Fill Rates
Perfect Order Fulfillment
Asset Management
Internal
Inventory Days of Supply
Capacity Utilization
Cash-to-Cash Cycle Time
Financial
Financial
Revenue
Profitability
Cash Flow
Enablers
Innovative New Processes & Technologies
Knowledge Sharing
Ideas & Suggestions
Sample Metrics
Responsiveness
Internal
Order Fulfillment LT
Flexibility
Internal
SC Response Time
Production Flexibility
Costs
Internal
Distribution & Transportation Costs
Manufacturing Costs
SC Costs as % of Revenue
Sample Metrics
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Example of Balanced Scorecard
The business level scorecard should contain 10-15 metrics representing
the various perspectives and supporting overall strategic objectives.
Include limits to
define when action is
required.
Use Red-YellowGreen or Good-FairPoor to rate status.
SAMPLE SCORcard FORMAT
Perspective SCOR Category
Customer
Internal
Assets
Assets
Costs
Revenue
Profitability
Innovative
Baseline Target
Reliability
%On-Time Delivery
Responsiveness Order Lead Time (Days)
Costs
Financial
KPI Description
Monthly Current
Limit Actual Status Rolling 12-Month Trend
N/A
Inventory Investment (Days)
%Capacity Utilization
Distribution & Transportation Cost
Return on Assets
Days Sales Outstanding
Cash-to-Cash Cycle Time
Total Supply Chain Costs
Sales vs. Plan
Revenue per Employee
Earnings Before Taxes & Interest (EBIT)
Training Hours per Employee
No. Positive Career Moves
No. Contributions to Knowledge DB
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Example of Balanced Scorecard
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Metric Profile
Develop a detailed KPI Profile for each metric:
Balanced Scorecard Perspective: Select the perspective Financial, Customer, Internal or Learning & Growth
Business Process Category: What business process is
being measured?- Customer service, Inventory Mgt,
Forecasting, Prod’n Planning, Warehousing, Distribution,
Freight, Training, Procurement, etc.
Owner: Who is accountable for the result of this KPI?
Document Name & Function:
Data Coordinator: Who is responsible for gathering the
data for the KPI? Document Name and Function.
Data Source: Where does the information come from?
Financial Systems, EDW, DW, SAP, Controller’s Book, etc.
Definition: What is measured? What are the primary
components. Fit into one sentence.
Purpose: Why do we measure this KPI? What is the
desired outcome?
Example graph of data
6
4
2
Frequency: How often is this metric reviewed? Hourly,
Daily, Monthly, Quarterly, Annually, etc.
Level of Detail: What level of information is available?
By product, project group, business, business group,
country, customer, customer segment, supplier, location,
etc.
Calculation: Document the formula and any special
components - average, count, mean absolute deviation,
percentage, differences, summation, etc.
Baseline Data: What year, month, or other time period
was used as the baseline?
Performance Targets: What performance do you require
at the end of the calendar year? How is this value
determined? - historical, business plan, estimates,
benchmarks, capacities, etc.
Tolerance: What is the allowable error to the target?
Data Availability: When is the data available for
updating?
Data Source Details: Describe in more detail where the
data comes from - EDW tables, queries, files, external
sources, etc.
Comments: Include possibility of automating data
collection, issues around gathering the data, potential
resources for the information. Include any other
information that tells the user more about the KPI.
0
JAN
FEB
MAR
APR
MAY JUN
Advancing Productivity, Innovation, and Competitive Success
The Use of Supply Chain Metrics
“Sometimes, you do know what you don’t know.”
Donald Rumsfield – Former Secretary of Defense
Advancing Productivity, Innovation, and Competitive Success
Uses of Performance Measures
– Communicate expectations
To ensure all members of the firm are working toward the same goals.
– Establish metrics
Aligned with focus goals and objectives.
– Measure and control key factors
Compare actual-to-target and take actions as needed.
– Track changes in performance
Detect trends and develop plans accordingly.
– Control operations
To obtain desired behaviors and results.
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Using Metrics to Drive Performance
- Manage-to-Target Process -
Define KPI´s,
Targets, &
Tolerances
Reward and
Recognize
Step 2
Generate
KPIs
Step 3
Compare to
Targets and
Forecasts
Step 4
Step 1
Determine
Root Causes
Perform Work
Step 6
Implement
Corrective
Actions
Step5
Set/Modify
Action Plan
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Characteristics of Effective
Measurement System
– Measure more than one function or activity
Don’t just measure cost or even revenue, cost, & profit. Include different
perspectives such as service, quality, innovation, etc...
– Can be used for decision-making
Include trends as well as absolute measures.
– Economical to obtain and apply
Leverage automation as much as feasible. Avoid metrics requiring people to
write things down or tally manually.
– Easy to understand and interpret
Use KISS principle. Avoid metrics which require interpretation for scorekeeping.
– Linked to strategy
For example, if focus of strategy is low-cost and delivery reliability, don’t
emphasize responsiveness or flexibility.
– Inspires the desired response
Is progress toward goals being made?
Smart-Measurable-Actionable-Relevant-Timely
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Some General Principles of
Measurements
– Don’t confuse process measures with people
example, don’t give individual’s productivity goals that encourage
measures. For
throughput at the expense of quality.
– People at all levels of the firm do better when they
choose their own measures (subject to strategy
are more enthusiastic and dedicated to metrics which they select.
checks). People
They must understand the competitive strategies and associated goals.
– A few well-chosen measures are better than many
measures—use Pareto’s Law.
Avoid, metric of the week syndrome and conflicting metrics which send confusing signals.
– There is a difference between data and
All firms create a great deal of data. For example, movement data,
information. inventory data, production data, etc… . To convert this data to
information the data must be processed into something meaningful and
measurable. For example, month-end inventory units are translated to
inventory dollars using standard costs and then aggregated and
compared with goals.
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Aligning Performance and Behavior
– Motivators inspire specific behavior
What motivates you?
– Demotivators discourage specific behaviors
For example, unattainable goals and metrics which focus on the individual
instead of the process can de-motivate.
– Considerations
• Intensity of response
What makes you try the hardest?
• Duration of response
For example, annual vs. point-intime metrics.
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Sample KPI’s
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Whirlpools Global Performance Metrics
• Total System Inventory (Asset Turnover & Expense)
• Total System Transportation Cost (Expense)
• Total System On-Time Delivery Performance
(Service and Revenue)
• Total Cash-to-Cash Cycle Time (Working Capital
Expense)
The entire management team is recognized or motivated based
on these performance metrics. Tradeoffs that improve the
whole at the expense of individual entities are common.
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BASF’s Global Performance Metrics
• Days Invested in Inventory (DIV)
• On-Time Delivery
- Capability (Did we say yes to original request)
- Reliability (Did we meet our commitment)
• Forecast Accuracy (S&OP Level)
• Planned vs. Actual Production (S&OP Level)
Service – Costs - Inventory
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Customer Service Scorecard – BU Level
Current
Month
2006
Current
Month
2007
$0
$0
0.00%
0.00%
Order
Accuracy
$0
$0
Delivery
Reliability
0%
0%
Delivery
Capability
0%
0%
0.0%
0.0%
Performance
Measurement
Shipped Not
Billed
Telephone
Service Factor
Service Level
Index
2006
Average
6 Mth Trend
Target
Within
Target?


X



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Days Invested in Inventory
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Quality of Inventory
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Forecast Accuracy (Prod-Pkg-Loc Level)
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2007 BASF Corporation Scorecard
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“It ain’t what you know, it’s what you
think you know that just ain’t so.”
Satchel Paige
Advancing Productivity, Innovation, and Competitive Success
Advancing Productivity, Innovation, and Competitive Success