Developing An Overview of Supply Chain Performance Metrics Process, Recommendations McKinsey October...

LONDON

SHOP

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E

Developing An Overview of Supply Chain Performance Metrics

Process, Recommendations

McKinseyOctober 2003

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LShop/Ldn/22Oct97Rp-fc/kf

McKinsey • Proprietary and Confidential

This document gives an overview of the different metrics that can be used to measure supply chain performance

• The Supply Chain CoE’s objective is to define a benchmarking framework capable of:

– Comparing generic metric performances for use on projects.

– Capturing further benchmarking data in a consistent format.

• The London Shop’s task:

– Develop an overview of the different metrics to measure supply chain performance.

– Select the most important metrics that can be used across industries.

– Discuss how the most important metrics link other operational metrics within each stage of the supply chain.

– Suggest how the supply chain CoE should continue concerning this topic.

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We used information from several sources during our project

• Internal and external documents:

– High level benchmarking framework for supply chain performance (H .Cook):• Shop Study (March 1997) accessing information from available experts and past projects.

– Supply chain benchmarks and best practice (Dow Polyurethane & Epoxy April 1995).

– Supply Chain Benchmark Assessment (March 1997).

– Supply chain appraisal and benchmarks: (client X September 1997).

• Discussions with supply chain CoE:

– Graham Colclough.

– Andrew Morgan.

– Lee Sherman.

– Deborah Huff (Cap McKinsey).

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Possible data sources

• CIPS (UK): Purchasing (& Supply Chain).

• APICS (US): Supply Chain.

• CAPS (US): Purchasing & Supply Chain (US & Legal):– Research Benchmark Industry Listings (http://www.capsresearch//

htm).

• NAPM (US): Purchasing.

• Kaiser Associates: Benchmark Specialist Consultant.

• US University Research: New global initiative (investigating entryopportunities—Bob Ackerman).

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Performance measurement is an important but complex subject

This document’s an initial step in the right direction.This document’s an initial step in the right direction.

Companies see the need for metrics. . . . . . but developing the “right” set of metrics is a challenge

• “If you can’t measure, you can’t manage, you can’t motivate”

• Establishing the proper measures within an organisation enhances continuous

• No commonly used “model”.

• Business issues that warrant performance measurement:

– Differ between industries.

– Differ within industry.

– Change overtime.

There is no one “right” answerThere is no one “right” answer

Focus

Accountability

Communication

Linking strategy to action

Assigning accountability

to take action when needed

Measuring progress towards goals through

interactive communication and

education

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We used a generic supply chain framework as a basis for our analysis . . .

Supply Chain Framework

Suppliers

Purchasing

Information Flow

Forecasting & Production Planning Customer Service

Inventory Management

InboundLogistics

Manufacturing

Maintenance

Marketing &Sales

OutboundLogistics

Integrated Supply Chain Management

Customers

This framework aligns with the CoE POV and is also similar to framework for the supply chain diagnostics inventory database.

This framework aligns with the CoE POV and is also similar to framework for the supply chain diagnostics inventory database.

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. . . and concluded there are three strategic objectives we should focus on when analysing the supply chain

Key metrics must give information on how a company is performing against old strategic objectives.

Key metrics must give information on how a company is performing against old strategic objectives.

Strategic objectives:Strategic objectives:

Quality

Time

Cost

Products/services according to customer

expectations

On agreed time

At reasonable cost

Purchasing

Information Flow

Forecasting & Production Planning

Inventory Management

InboundLogistics

Manufacturing

Maintenance

Marketing &Sales

OutboundLogistics

Integrated Supply Chain Management

Customer Service

Supply Chain Framework

NB: Boundaries• NPDI• Support functions

Tailor to company specific (BSC)

objectives

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We began with a brainstorming session on the key drivers for quality, time and cost

The complete picture can be found in the appendix.The complete picture can be found in the appendix.

• We looked at the supply chain from the customer’s perspective.

• We brainstormed on “what could go wrong along the supply chain”:

– What are drivers of performance from a quality, time and cost point of view.

PricePrice ServiceService Product quality

Product quality

Product quantityProduct quantity

Product delivery

Product delivery

Late arrival Late

arrival Late

deliveryLate

deliveryInventory

costInventory

costProduct

costProduct

costProduc-tion cost

Produc-tion cost

Delivery cost

Delivery cost

Customer service

cost

Customer service

cost

Quality Time Cost

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Making their client specific warrants attention

• Respect all sources of data:

• Understand their relationships—the “causal tree”:

• Recognised Cross-Industry; In-Industry and In-Company similarities and differences.

Blind-sided Intuition Opinion Discussion Survey Functional Measures KPIs External Best Practice

Qualitative Quantitative

Objective 1

KPI

KPI

KPI

KPI

Objective 2

• KPI and xxx measure• “Dual service” measures (

cost & time)• “Hard wired” and tennons• Push-pull

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Making their client specific warrants attention (cont.)

• Recognise Cross-Industry; In-Industry; and In-Company similarities and differences.

• Interface the solution to the current clients’ measures, systems, processes and culture:

– . . . and guide migration over time.

Ensure accountability for collecting and actioning is clear.Ensure accountability for collecting and actioning is clear.

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Proposed Supply Chain KPIs

KPI’s help to identify “where” the performance problem is within the supply chain, and steer towards areas to explore “why”.

KPI’s help to identify “where” the performance problem is within the supply chain, and steer towards areas to explore “why”.

Accuracy (as % of sales)

Customer satisfaction

% of satisfied customers

Total cycle time

Time (for customer) from placing order to

receiving goods

% of products delivered on

time

Total supply chain cost as %

of sales

Cost per product sold as

% of sales

Cost as % of sales

% of products delivered

according to customer order

(quantity/quality)

% of customers satisfied with

service

% of products ordered already

in stock

Defect rate of products as % of

production

% of goods delivered

according to order

(quantity/quality) by supplier

Time from order placement to reception of goods

Time from production order to delivery into finished product warehouse

Downtime as % of total

production time% of goods delivered on time by supplier

Cost as % of sales

Cost as % of sales

Cost as % of sales

Number of stock turns/years

Total Supply Chain Forecasting Purchasing Inbound Logistics Manufacturing Maintenance Inventory

Management Marketing & Sales Customer Service Outbound Logistics

Quality

Time

Cost

% of active suppliers that

account for 90% of total purchase

value

Need to identify M&S

KPIs

BEWARE of inter-

relationships

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Each stage of the supply chain has a variety of metrics to monitor operational effectiveness

These metrics help identify “why” there is a performance problem.These metrics help identify “why” there is a performance problem.

Forecasting Purchasing Inbound Logistics Manufacturing Maintenance

Quality

Time

Cost

• Actual vs. forecasted sales

• % of data which can be used without modification in the planning process

• % of all active suppliers that account for 90% of total purchase value

• % of correct orders placed• # of alternative sources of supply• # of suppliers involved in product

development/innovation• # of suppliers per purchasing

employee (purchasing professional)

• # of vendors products ordered• Purchasing head count as % of

total head count

• % of goods delivered according to order (quantify/quality) by supplier

• # of carrier alliances• # of overshipments• % of direct material purchases that

are not inspected at incoming quality assurance, going from stock to dock

• % of direct material purchases that are not inspected at incoming quality assurance, going from stock to production

• % of orders delivered without unplanned communication or special attention

• Defect rate of products as % of production

• Scrap rate as % of production• # of changes per production period• % of goods repackaged• Actual vs. production capacity

• Time from order placement to reception of goods • Time from production order to deliver into finished product warehouse

% of accounts payable handled before due date

• % of accounts payable handed in 1–30 days

• % of accounts payable handled in 31–60 days

• % of accounts payable handled in 61–90 days

• % of accounts payable handled in over 90 days

• % of suppliers connected via EDI• Average actual time to developed/n

egotiate a contract

• % of goods delivered on time by supplier

• Proportion of suppliers who deliver daily

• Proportion of suppliers who deliver frequently than monthly

• Proportion of suppliers who deliver monthly

• Proportion of suppliers who deliver twice weekly

• Response time to schedule changes• Response time to unforeseen

problems• Turnaround time on rejected items

• Average production leadtime• Current manufacturing leadtime• Minimum production leadtime

• Downtime as % of total production time

• Downtime due to parts shortage (or stock outs in general)

• Hours of unplanned downtime

• Cost as % of sales • Cost as % of sales

• Cost as % of total costs• Cost of orders purchased (range• Cost of vendor transactions (range)• Cost of expedite repair materials• Purchasing spend per supplier• Purchasing spend per purchasing

employee (purchasing professional)

• Cost as % of sales• Cost as % of total sales

• Cost as % of sales

• Cost per saleable unit• Cost per unit produced

• Cost as % of sales• Cost per unit produced

Source: H. Cook

• Nos of strategies, or “uptime” service-based contracts

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In addition to the KPIs each stage of the supply chain has a variety of metrics to monitor operational effectiveness (cont.)

Inventory Management Marketing and Sales Customer Service Outbound Logistics Total Supply Chain

Quality

Time

Cost

• % of products ordered already in stock• Defect rate of products as % of

products leaving warehouse• Accuracy of inventory records• Inventory vs. service level• Items in inventory as % of total unit

purchases• Obsolete vs. active inventory

• % of correct orders taken• # of additional sales from customer

referrals• # of order changes as % of orders filled• % of orders handled with commitment to

product/service delivery on first call

• % of customers satisfied with service• # of complaints as % of total orders• # of phone calls to customer service

development per order shipped• # of complaints due to On-time delivery;

Order Entry; Packaging; Product quality; Shipping Error

• # of complaints as % of total orders• # of customer contacts per order• # of enquiries (including complaints) that

were not answered to the customers satisfaction

• # of information requests as % of customer orders

• % of calls abandoned, answered by recording, delayed

• % of customer contact through customer service

• % of customer follow-up handled by Customer Service Representative; Department Manager; Field Representative; Responsible Manager

• % of invoices containing errors• % of orders delivered complete and

without error (order fill rate)• % of orders that are damaged on arrival

at customer site• % of respondents that can handle

complaints without handing off to other person/dept.

• Average % of disputed invoices

• % of products delivered according to customer order (quantity/quality)

• Degree of utilisation of facilities (%)• Equipment utilisation—load• Equipment utilisation—weight

• Time from order placement to start of delivery

• Customer satisfaction (rating)• % of satisfied customers• % of information on credit history limit av

ailable On-line• % of information on open-order history a

vailable On-line• % of information on outstanding balance

available On-line• % of information on pricing available On-l

ine• % of information on product history avail

able On-line• % of information on product ID code avail

able On-line• % of information on shipping points avail

able On-line• Ratio of operations labour as % of passiv

e labour

• Average # of orders rejected• Average product time in warehouse• No. of days consumption in stock (A-

goods)• No. of days consumption in stock (B-

goods)• No. of days consumption in stock (C-

goods)• No. of days safety stock (A-goods)• No. of days safety stock (B-goods)• No. of days safety stock (C-goods)• No. of products with duplication stock• Planned days of inventory on hand

• % of accounts receivable settled before due date

• % of accounts receivable settled in 1–30 days

• % of accounts receivable settled in 31–60 days

• % of accounts receivable settled in 91 days

• % of accounts receivable settled in61–90 days

• Delivery time• % of products delivered early• # of deliveries per manhour• % of orders delivered on time (as defined

by customer)• % of orders delivered with an average de

lay of 1 month• Average # of days delay after scheduled

ship date

• Total cycle time• Time (for customers) from placing order to

receiving goods• % of products delivered on time• Average customer quoted leadtime• Average leadtime from receipt of order to shipment• Average time taken to access information• Cash to cash cycle• Longest customer quoted leadtime• New product introduction time• Product changeover time• Shortest customer quoted time• Time from receipt of order to receipt of

shipment by customer• Time taken to rectify incorrect or damaged orders

• Average time taken to respond to requests

• Cost as % of sales• # of stock turns/year• Cost as % of cost of goods purchased• Carried worth of expired lots• A-goods as a percent of inventory• Average stock level• B-goods as a percent of inventory• C-goods as a percent of inventory• Inventory cost as % of total assets (gross

assets)• Maximum stock level• Minimum stock level

• Cost as % of sales • Cost as % of sales• Cost per delivery• # of route miles per delivery• # of warehousing facilities• # of warehousing of locations• % of transportation units owned by

company• Cost per order• Cost per route

• Total supply chain cost as % of sales• Cost per product sold as % of sales• % of profit from base purchase• % of profit from increased purchases• % of profit from premium pricing• % of revenue generated by largest

customer group (top 20%)• Cost per product sold as % of sales• Operating profit per customer as % of

operating costs per customer• Total cost per order• Total cost per unit produced

• Cost as % of sales

Source: H. Cook

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Given the multitude of metrics we suggest to analyse supply chain performance using a hierarchy of measures

. . . digging through the causal tree to improve business performance.. . . digging through the causal tree to improve business performance.

Key KPI

SupportingMetrics

Other OperationalMeasures

Type of Measure Example Highest Level

Use Who Uses It

• Forecasting accuracy (as % of sales)

• Integrated supply chain

• Generic benchmarking

• Consultant• Top management• Supply chain

stage manager

• % of suppliers connected via EDI

• Supply chain stage diagnostic

• Consultant• Supply chain

stage manager

• A-goods as a % of inventory

• Supply chain stage diagnostic

• Supply chain stage manager

Objective

• Find “where” the problem is within the supply chain

• Identify the “why” within the supply chain stage

• Give more in-depth information about supply chain stage

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For example, the quality of customer service performance can be clearly measured at three different levels

Quality

Key KPI’s Suggested Supporting Metrics

Other Operational Measures

• % of customers satisfied with service

• # of complaints as % of total orders

• # of phone calls to customer service department per order shipped

• # of complaints due to: order entry, packaging, shipping error, . . .)

• % of calls abandoned, answered by recording, delayed, . . .

• % of complaints handled by: customer service rep., department manager, . . .

• KPI’s will be measured for generic benchmarks, whilst operational metrics will be measured by a customer service manager.

• . . .

• # of complaints that were not answered to customer satisfaction

• Average number of orders rejected

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Outbound logistics performance . . .

• % of products delivered according to customer order (quantity/quality)

• (These can often be driven by customer service metrics)

• Degree of utilisation of facilities (%)

• Equipment utilisation (load/weight)

• Delivery time• % of orders delivered on

time (as defined by customer)

• # of deliveries/man hour• % of orders delivered early• % of orders delivered with

an average delay of 1 month

• Average number of days of delay after scheduled ship date

• Cost as % of sales • # of route miles per delivery• # of warehousing

facilities/locations• % of transportation units

owned by company

• . . .

• Cost per delivery• Cost per order• Cost per route

Quality

Time

Cost

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Quality

Time

Cost

For maintenance, commonly used supply chain performance metrics relate to time and cost

• The quality of maintenance is commonly measured by lag measures in terms of cost or as a production measure (downtime).

• We suggest the use of two lead measures that proactively monitor maintenance performance.

• . . .

• Number of service contract• Number of training days

for maintenance staff

• Downtime as % of total production time

• Cost as % of sales• Cost per unit produced

• Downtime due to parts shortage (or stock outs in general)

• Hours of unplanned downtime

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Just remember . . .

• A large number of metrics exist, so be selective.

• A step by step approach to measuring supply chain performance should be undertaken in order to avoid being overwhelmed by data.

• The following segmentation gives us such an approach:– 23 key KPI’s allow us to identify “where” the problems” exist within the supply chain.

– Key supporting metrics then allow us to answer “why” the problems exist.

– Operational metrics allow us to go analyse the supply chain stage in more detail.

• The “right” set of metrics does not exist for a given industry or even a specific company.

• The “right” set of metrics is dynamic like the business it measures and will change with the type of industry/problem and over time.

• . . .

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Next Steps for the Supply Chain CoE

• Agree on how you will go forward after this project.– Agree on objectives, scope and accountabilities.

– Eg. Discuss if each GMT needs its own supply chain metrics.

• Further populate the supply chain benchmarking framework.– See example for Purchasing.

• Championing (S. Beck/Disc. Heads).

• . . . and roll-out.

• Continuous improvement process.

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Appendix

• KPI Definitions.

• Causal Trees:– Quality

– Time

– Cost

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Purchasing Data: KPIs & Benchmarks

a: CAPS Research: Chemical Purchasing Benchmark 1997; H. Cook shop research.

Industry Sector Benchmarking Range/Best Practice

(Validate source)

Average Manufacturing

(Validate source)

Chemicals Best Practice

(Validate source)

Global Chemical Purchasinga

0.06%–3.0% 0.30%

Measure

QU

AL

ITY

TIM

EC

OS

T

Automotive (Global)a

Pharma. (Global)a

Eng./Constr. (Global)a

• % of correct orders placed• # of alternative sources of supply• # of suppliers involved in product

development/innovation• # of active suppliers per purchasing professional• # of vendors products ordered• % of all active suppliers that account for 90% of

total purchase value• % of purchases handled by purchasing

department• Purchasing head count as % of total head count• % purchases handled by purchasing function• % spend on long-term basis (>2yrs)• % firms using consortium buying• Training per purchasing professional

• % of accounts payable handled before due date

• % of accounts payable handed in 1–30 days• % of accounts payable handled in 31–60 days• % of accounts payable handled in 61–90 days• % of accounts payable handled in over 90 days• % of suppliers connected via EDI• Average actual time to developed/negotiate a

contract• % goods delivered on time by supplier• Time from order placement to receipt of goods

• Cost as % of sales• Cost as % of total costs• Cost of orders purchased (range• Cost of vendor transactions (range)• Cost of expedite repair materials• Purchasing spend per supplier• Purchasing spend per purchasing• Purchase Dept. expense (¢ per $ sales)

65%

29%4%1%1%

9 weeks

59%

$24.8m31/100 ¢

18 cos £12bn

2–26 weeks

50%

42%6%1%1%

61%

26.515/100 ¢

!0 cos $23bn

50–87

20%

1–10%

6–182 9–267

5–75%

0.3%–4.5%

165

7.9%(18% xxx)

82

1.4%82%50%

22

26

1%97%

272

0.4%

27%26%

42 hrs

30

21

5.5%

11% 79% 33% 1%

19%

2610/100 ¢

19 cos $3.5bn

459/100 ¢

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ServiceService Product DeliveryProduct Delivery

Wrong Info.Wrong Info.Higher Prices

Than Competitors

Higher Prices Than

Competitors

Higher Margin Than

Competitors

Higher Margin Than

Competitors

Badly Set Customer

Expectations

Badly Set Customer

Expectations

Wrong Order Information

Wrong Order Information

Unable to Meet Customer Demand

Unable to Meet Customer Demand

Produced Faulty GoodsProduced

Faulty GoodsProducts Damaged After Mfg

Products Damaged After Mfg

PricePrice Product QuantityProduct QuantityProduct QualityProduct Quality

Delivered Faulty Goods

Delivered Faulty Goods

Quality

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Did Not Have the Right Materials

Did Not Have the Right Materials

ForecastsIncorrect

ForecastsIncorrect

InformationFailure

InformationFailure Human

FailureHumanFailure Technical

FailureTechnical

Failure

Late ArrivalLate Arrival Late Departure

Late Departure

Late ArrivalLate Arrival Information Failure

Information FailureInfrastructure

FailureInfrastructure

Failure Product Failure

Product Failure

WrongInformation

WrongInformation

Info. Sent to WrongPerson

Info. Sent to WrongPerson

InformationSent Late

InformationSent LateProduct Not

in StockProduct Not

in StockFaultyProductFaulty

ProductHumanFailure

HumanFailureTechnical

FailureTechnical

FailureUn-

controllableFactors

Un-controllable

FactorsInformation

Failure

InformationFailure

InfrastructureFailure

InfrastructureFailure

HumanFailure

HumanFailure

Did Not ProduceAnymore

Did Not ProduceAnymore

Did Not ProduceEnough

Did Not ProduceEnough

InformationSystem Failure

InformationSystem Failure

Technical Failure

Technical FailureHuman

FailureHuman Failure

Could Not Produce

To Capacity

Could Not Produce

To Capacity

Total Capacity

Too Small

Total Capacity

Too Small

Other ProductionPriorities

Other ProductionPriorities

Materials Not

Delivered

Materials Not

Delivered

Wrong MaterialsDelivered

Wrong MaterialsDelivered

Materials Delivered

Late

Materials Delivered

Late

SuppliersForgot

SuppliersForgot We Did Not

OrderWe Did Not

OrderSuppliers

GotOrder Wrong

Suppliers Got

Order Wrong

We Got Order Wrong

We Got Order Wrong

SuppliersDelivered

Late

SuppliersDelivered

LateWe Ordered

LateWe Ordered

Late

Time

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Purchasing CostPurchasing Cost Customer Service CostCustomer

Service CostInventory CostInventory Cost Delivery CostDelivery CostProduction CostProduction Cost

Too Much Stock

Too Much Stock

Wrong Type of Products

Wrong Type of Products

Obsolete StockObsolete Stock

Infrastructure Stock

Infrastructure Stock

Human Resources

Costs

Human Resources

Costs

Used More Expensive Materials

Used More Expensive Materials

Materials Arrived LateMaterials

Arrived Late Human FailureHuman Failure Technical Failure

Technical Failure Human

Resource CostHuman

Resource Cost Maintenance Cost

Maintenance Cost ComplaintsComplaints

WastageWastage PlanningPlanning

Used More Raw MaterialsUsed More

Raw Materials

Higher Cost Than

Competitor

Higher Cost Than

Competitor Ordered LateOrdered Late Different Materials

Different Materials

PeoplePeople SystemsSystems

Same Suppliers

Worse Deal

Same Suppliers

Worse DealDifferent SuppliersDifferent Suppliers

SkillsSkills ProductProduct MOTMOT

Promotion Sales Volumes

Lower

Promotion Sales Volumes

Lower

Don’t Know How to

Negotiate

Don’t Know How to

NegotiateMany

SuppliersMany

Suppliers

Cost

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Definitions for the Supply Chain KPIs

• Forecasting:– Accuracy (as %of sales).

• Purchasing:– % active suppliers for 90% spend.

– Time from order placement to receipt.

– % of goods delivered on time.

– Cost as % sales.

• Inbound Logistics:– % of good delivered according to order (quantity/quality) by supplier.

– Time from order placement to reception of goods.

– % of goods delivered on time by supplier.

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Back Up Panels

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Drivers and KPIs are however linked throughout the supply chain

• They form a “causal tree” along the supply chain which varies between industries and over time

• They do not simply drive and explain just quality, time or cost, they may drive or explain all three

• We have simplified the tree in this presentation:

– We have left out the links and kept the model on a generic level

We have not developed a “perfect” modelWe have not developed a “perfect” model

Function/Process Stage

Quality

Time

Cost

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These operational metrics should be used with care

• Ideally they should support key KPI’s by explaining why performance is meeting/below expectations.

• They should also give an in-depth picture into how well each supply chain stage is performing.

• However, their use calls for judgement:– They vary across companies and industries (which explains the large quantity of metrics available).

– Many are not directly linked to key KPI’s but are useful secondary indicators of performance.

– They do not necessarily link to performance at just one stage in the supply chain (but accountability must be assigned to someone within one stage).

– For example: inaccurate order making could lead to more time being spent on puchasing, suppliers delivering the wrong goods and/or suppliers delivering the goods late.

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