Date post: | 14-Feb-2018 |
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What is a Metric?
a criterion
a standard
a measure
to evaluate performance and reinforce company values
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Our Perspective
We believe some common SCM metrics are
misused, misaligned, misunderstood or
just plain worthless
Today’s examples • Inventory turns
• PPV
• Shipping schedule attainment
• Capacity
• Cycle count reporting
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Inventory Turns
annual cost of goods sold
÷ average inventory $
Compare similar companies and measure internal trends
and goal attainment
So what’s wrong with this metric?
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It’s Meaningless! … too many assumptions
• We assume less inventory is better
• Assumes all inventory is equal; obsolete, slow moving, build ahead, banks
• Assumes inventory exists in a vacuum; does not consider strategy or S&OP plans
• We make SCM responsible for increasing the turns and assume they can affect all the inventory
What’s the alternative?
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The Alternative
Define who “owns” the various types of inventory • FG – whoever develops the forecast (usually Sales or Marketing)
• Purchased material – Purchasing
• WIP – Operations
• Obsolescence – Who caused it?
• Safety Stock – Who decides how much? Why? Uncertainty in
demand and/or supply
• On hold, awaiting disposition, rejects, pending rework – Who’s
responsible for initiating action?
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The Alternative
Report inventory turns by “owner”
How do we achieve improvement?
Define ownership
Develop goals for each type of inventory
Align accountability metrics with goals
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Improving
Each owner drives lot sizes towards one and leadtimes towards zero,
starting with ‘A’ items
Will likely reduce inventory but that’s not the goal
Goal: optimize lot sizes and leadtimes for every item
Achieve optimal inventory for every item
Will also reduce complexity and simplify planning and production
processes
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So…
If we follow this plan, whatever the inventory
turns is, it’s the right one…
for now
Today’s optimal inventory will change as owners drive
lot sizes towards one and leadtimes towards zero
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Purchase Price Variance
We don’t like the potential subversions… • Who sets the cost standard?
• What are the cost standards based on… lot size, leadtime,
commitment horizon?
• Does spot buying for cost come at the expense of quality?
• Does favorable PPV come at the expense of customer service
and flexibility?
• Is transportation cost included in the item cost?
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Purchase Price Variance
PPV is important for cost-driven companies
BUT
Low cost is the goal… not favorable
variance against a standard
Caution:
low cost may not be the goal if the business
competes on image, delivery, quality, flexibility, variety…
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Purchase Price Variance
For companies whose strategy is not lowest
cost, a focus on PPV may be
counterproductive
For companies whose strategy is
lowest cost, must eliminate potential
perverse incentives
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Purchase Price Variance
In the presence of perverse incentives,
PPV gives the appearance of cost
improvement at the expense of real
improvement
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Shipping Schedule Attainment
What we don’t like:
Are we measuring operations performance? • quality problems
• raw material delivery
• tooling
• staffing/training
• capacity
OR…
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Shipping Schedule Attainment
Are we measuring promise performance?
• leadtime
• forecast/safety stock
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Shipping Schedule Attainment
Regardless of whether we measure
operations or promise performance
Shipping Schedule Attainment tells us
nothing until it’s too late!
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Shipping Schedule Attainment
At this point the metric is often only
used punitively
Determining what went wrong requires
dependable memories and willingness to
investigate the past, determine causes and make changes
And it’s still too late
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Shipping Schedule Attainment
We need to know production is behind schedule
before it’s too late to do something about it
Instead, focus on contributing metrics:
• raw material delivery schedule attainment
• tooling availability
• trained workforce
• component/assembly schedule attainment
• anything else that delays/limits production
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Shipping Schedule Attainment
Shipping on time is just luck if contributing
processes are late or resources unavailable
Focus on contributing metrics and watch
your shipping schedule attainment
improve!
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Capacity
Do most companies have a capacity strategy?
If they do, do they have appropriate capacity
metrics?
If they do, do they have consensus on
required and available capacity?
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Capacity
Without a capacity strategy, there are no appropriate capacity metrics
Capacity Strategies (aligned with business strategy)
• Advance
• Incremental
• Wait-and-See
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Capacity
Align metrics with strategy
Examples:
Advance strategy – measure available capacity
Wait-and-See – measure utilization
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Capacity
How do we know how much capacity we
have (available)?
How do we know how much capacity we will
need (required)?
Do we all agree?
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Capacity
Available Capacity
Easy to determine in a lean/flow environment; not
so easy in other environments
Available capacity =
efficiency x utilization x time available
Each factor requires interpretation and agreement
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Capacity
Required Capacity
Easier to determine in a lean/flow environment,
just calculate takt time
Required capacity =
Setup + (qty. x run time/unit)
Each factor requires interpretation and agreement
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Consensus Capacity Analysis Report
(100%)
Hours Req. at Hours Required at Various Effectiveness
Workcenter Avail. Standard 90% 80% 70% 60% 50%
LRGPRS 4000 4500 5000 5625 6429 7500 9000
SMLPRS 4000 2000 2222 2500 2857 3333 4000
SUBASM 3000 2500 2777 3125 3571 4167 5000
Arrive at consensus
Develop metrics based on the consensus
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Cycle Count Reporting
What we don’t like:
The purpose of cycle counting is not universally understood
The purpose is to find and resolve the causes of variances
It’s a form of process control
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Cycle Count Reporting
The causes of count variances are seldom
resolved because there are too many of them
• We fail to fix known causes of inventory inaccuracy before starting
• We fail to identify parts inappropriate to count before starting
• Cycle count programs do not allocate sufficient staffing to analyze
and resolve the variances
• We fail to assign responsibility for inventory accuracy
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Cycle Count Reporting
Result:
• Only point-in-time corrections to balances
• Metrics measure only the number of counts and
adjustments
(without overtime)
Real Focus: measure the success rate for
identifying and resolving causes
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Cycle Count Reporting
Getting it right…
• Eliminate the known causes of variances
• Remove inappropriate parts from cycle counting
• Provide adequate staffing to both count and
analyze variances
• Assign responsibility for inventory accuracy
• Develop metrics for identification and elimination
of the causes of variances
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