KPIs: Improving Supply Chain Performance Management

Northeast Supply Chain Conference and ExpositionFramingham, MA

September 19 – 21, 2004

Tim Dolan, C.P.M.Manager, New Product Support

Global Procurement OrganizationThe Gillette Company

Agenda

• The Gillette Company Overview• Key Performance Indicators – What Are They?• The Case for Measuring Indirect KPIs• Developing Indirect KPIs• Sample KPI Scorecard• Guidelines and Benefits

Gillette History

• Founded in 1901 by King C. Gillette• Boston, Massachusetts

World-Class Brands, Products, People

• $9 Billion in Sales (2003)• Multinational Corporation• Gillette - Recognized Brand Worldwide• 32 Manufacturing Centers

– 15 Countries– 200+ Markets

• Approximately 29,000 employees worldwide• 4 primary Business Units

– Grooming• Blades & Razors• Personal Care

– Batteries– Oral Care– Appliances

• Innovative: 47% of Sales from Products less than 5 years old

Gillette Products

What are Key Performance Indicators (KPIs)?

KPIs are measurements of a supplier or service provider’s performance in key activity areas

Price Delivery Quality

Performance to schedule

Total product cost

Product reliability and consistency

KPIs have historically been used to measure direct material suppliers’ performance

Price

• Cost reductions• Cost competitiveness

Delivery

• Quantity

• On-time delivery

• Paperwork

• Shipment condition

Quality

• Rejected and nonconforming

• Process capability, data/samples

History of Indirect KPIs

Jim Kilts’“Circle of Doom”

•Centralize procurement

• Implement Strategic Sourcing (SSI)

KPIs sustain strategic sourcing savings

Source: “Jim Kilts Is An Old-School Curmudgeon”, Fortune, December 30, 2002

TradePractices

SupplyChain

FinancialPractices

What is Indirect Spend?

• Computer/Telecom• Energy/Utilities• Printing/Marketing/

Advertising• Employee Benefits• Office Products• MRO

• Travel• Facilities• Professional Services• Fleet• Logistics• Capital Equipment

Indirect spend is the sum of expenditures for goods or services that are not components of the end product or service delivered to a customer

The average indirect spend for Fortune 500-size companies is 50% of total spend

$0$100$200$300$400$500$600$700

Group Total GeneralManufacturing &

Mining

Chemical/Petroleum

Direct Indirect

Utilities/Engineering Construction

Consumer Products

Aerospace, Defense, DoD

and DoE Contracting

Source: CAPS Critical Issues Report, September 2003

($ Millions)

Purchase Spend as a Percentage of Total Purchase SpendMedian spend = $434M

5%

48%

20%

8%8%6%5%

Other:AccountingFacilitiesLegalLogisticsReal EstateTemp LaborTravel

Construction/Eng

Total

Source: Defining and Determining the “Services Spend” in Today’s Services Economy, CAPS, July 2003

Marketing ITPro Services

IndirectGoods

21%Services

33%

Manufacturing

Direct Material

51%

Inventory

Spend for services accounts for more than half of a company’s indirect spend

Participants in a recent CAPS survey expect indirect spend for services to increase

$434 $456 $478$502

$529

2002 2003 2004 2005 2006

Indirect Spend - Services($ Millions)

5-yr CAGR = 5%= Projected

Source: Services Purchases: Not Your Typical Grind, Inside Supply Management, September 2003Note: Chart represents respondents’ median spend

Developing KPIs for Indirect Suppliers

Contract Compliance

Cost Competitiveness and Continuous Improvement

Customer Satisfaction

Definitions of Supplier Criteria

Ultimate objective is to be able to quantifiably measure and compare individual supplier’s performance

• How well does the supplier deliver on the terms, conditions and prices agreed to in the contract?

• How well does a supplier satisfy our customers from a product or service quality perspective?

• How cost competitive is the supplier from an industry perspective and from a historical perspective?

• How well does the supplier continue to enhance the product/service, process or cost?

Evaluation criteria for indirect suppliers can be grouped into three categories

Attributes• Actual cost vs.

budget • SLA

responsiveness• On time deliveries• Return rate• Order and billing

accuracy• Average lead-time

• Customer Surveys

• Technical Support

• Supplier vs Industry

• Supplier vs Other Benchmark

• Ecommerce capability

• Supplier Partnership Initiative

• Cost Reduction Target

Contract Compliance

Customer Satisfaction

Cost Competitiveness and Continuous Improvement

Objective and subjective attributes are necessary for measuring indirect suppliers

Specific KPIs can be tailored to meet the needs of various suppliers

Indirect KPIs can use a 1 to 5 scale to score KPIs and a weighting system which allows some flexibility, but keeps weights significant and relatively consistent

Indirect Supplier Evaluation Criteria

Standard Scores

5 = Superior – far exceeds expectations

4 = Exceeds expectations

3 = Meet expectations

2 = Does not meet expectations

1 = Needs improvement; significantly does not meet expectations

Contract Compliance

Customer Satisfaction

30-50% 20-30% 100%

Cost Competitiveness and Continuous Improvement

=30-50%

Allowing flexibility with category weighting ensures that the KPI scorecard is tailored to meet the unique needs of the measured supplier

Contract Compliance

Contract Compliance Attributes

• Actual costs versus budget• Service level results• On time delivery• Return rate• Order and billing accuracy• Average lead-time

Contract compliance attributes mirror the supplier’s contractual commitments

Customer Satisfaction

While KPIs measured with objective data are the most reliable, it can be argued that they do not capture the entire picture in regards to supplier performance

Traditional KPI constraints:

• Difficult to evaluate the interactions of supplier personnel with customers

• Quality can only be measured in regards to damage or breakdown, and is difficult to measure for services

• Strong traditional supplier KPI data does not necessarily indicate whether or not the customer is satisfied

Customer Satisfaction

Surveys provide mechanism to help evaluate

supplier performance

Customer Satisfaction Surveys capture the customer‘s opinions in regards to supplier performance.Supplier Interaction: Infrequent ___ Moderate____High ____Questions:

– I feel the supplier provides high quality goods and services.– I feel the supplier provides high value for the cost.– I would recommend this supplier to others.– When I have questions, this supplier responds in a timely manner.– If there is an issue, this supplier resolves the issue in a timely manner.– If there is an issue, this supplier resolves the issue to my satisfaction.– In my opinion, this supplier deserves recognition as a top supplier.

Scale:– 1: Strongly Disagree– 2: Disagree– 3: Neutral– 4: Agree– 5: Strongly Agree

Customer satisfaction surveys can be a primary determinant of customer satisfaction

A comprehensive supplier measurement system can mitigate customer satisfaction survey limitations

• Customer satisfaction tends to be overwhelmed by bad experience, even if the bad experience was not the supplier‘s fault

• Most recent experience is recalled; not overall supplier performance

• Surveys tend to be subjective

• A single negative response can skew results

• Response rate tends to be low

• Evaluate responses in relation to other KPI data. Conduct enough surveys to mitigate this effect

• Adjust weighting for Customer Satisfaction Survey where commodity has a great deal of objective data

• Utilize statistically significant sample size and possibly discard highest and lowest scores

• Target key customers with vested interest and explain significance of KPI

Issues Mitigating Techniques

Cost Competitiveness and Continuous Improvement

Benchmarking establishes cost competitiveness

• Supplier vs industry• Supplier vs other benchmark

– Standard or target prices

– “Should” cost prices

– “Price paid” indices

– Consumer Price Index (“CPI”)

• Ecommerce capability

Comparing supplier pricing against benchmarks assists in avoiding “price creep”

Cost Competitiveness and Continuous Improvement Guidelines

• In addition to KPIs that measure cost versus competition and industry standards, continuous improvement, supplier process improvements and/or cost saving targets can be established

• Define baseline spend that generates the savings target

Cost Saving Guidelines 5 = Superior – far exceeds expectations 6% or more

4 = Exceeds expectations 4 – 6%

3 = Meet expectations 2 – 4%

2 = Does not meet expectations 0 – 2%

1 = Significantly does not meet expectations 0%

Collecting the Data

Evaluate the costs/benefits of each data collection method available

Unbiased company

collected data electronically

Data collected / tracked by

supplier

Recommendedapproach

Cost to collect data

Data collection is the most difficult and time-consuming activity in the KPI process. However, it is integral to a successful KPI program.

A wide range of sources can provide measurement data

ERP Systems Supplier-provided reports

Third-party data

Industry benchmarks

Customer Satisfaction

Surveys

Data Warehouse

Attaching the data and documentation to the scorecard validates scoring and makes it possible for the supplier to take corrective action

The KPI Scorecard

Sample Scorecard - Temp Labor KPIsGlobal Procurement Balanced Scorecard

TEMPORARY LABOR : ABC Staffing

Target Performance

Actual Performance Weight

Weighted Score

Contracts Compliance 4.0 4.0 30% 1.20

Customer Satisfaction 4.0 4.3 30% 1.29Cost Competitiveness/Continuous Improvement 4.0 3.5 40% 1.40

OmniMark Cutoff 4.00Vendor Score 3.89OmniMark Eligible No

SUPPLIER: ABC StaffingContract Compliance Customer SatisfactionMetric Act Score Weight Weighted

Confirmation of Order Delivery w/i 2 hoursSuperior 100% 5 0.1 0Excellent 95-100% 97% 4 0.1 0.4Good 92-95% 3 0.1 0Needs Improv 90-92% 2 0.1 0Not Acceptable <90% 1 0.1 0

Qualified Resumes Received w/i 24 hoursSuperior 100% 5 0.4 0Excellent 97-100% 98% 4 0.4 1.6Good 95-97% 3 0.4 0Needs Improv 92-95% 2 0.4 0Not Acceptable <92% 1 0.4 0

Selected Candidates Available w/i 72 hoursSuperior 100% 5 0.3 0Excellent 95-100% 97% 4 0.3 1.2Good 90-95% 3 0.3 0Needs Improv 85-90% 2 0.3 0Not Acceptable <85% 1 0.3 0

Consolidated Billing / AccuracySuperior 100% 5 0.2 0Excellent 96-100% 97% 4 0.2 0.8Good 93-96% 3 0.2 0Needs Improv 90-93% 2 0.2 0Not Acceptable <90% 1 0.2 0

Weighted Cat Avg 4.0CommentsTop 3 metrics covered by new T&A log

Progress reviewed with supplier semi-monthly (initially)

Each resume / position category is a "transaction"

Customer SatisfactionMetric Act Score Weight Weighted

Candidates Received Survey (beginning of process)Superior 100% 100% 5 0.3 1.5Excellent >=90% 4 0.3 0Good >=80% 3 0.3 0Needs Improv >=70% 2 0.3 0Not Acceptable <70% 1 0.3 0

Temporary Attendance RateSuperior 100% 5 0.2 0Excellent >=90% 90% 4 0.2 0.8Good >=80% 3 0.2 0Needs Improv >=70% 2 0.2 0Not Acceptable <70% 1 0.2 0

Temporary Turnover RateSuperior 0% 5 0.1 0Excellent <=2.5% 2.0% 4 0.1 0.4Good <=5.0% 3 0.1 0Needs Improv <=10% 2 0.1 0Not Acceptable >10% 1 0.1 0

Candidates Selected Survey (end of process)Superior 100% 5 0.4 0Excellent >=90% 90% 4 0.4 1.6Good >=80% 3 0.4 0Needs Improv >=70% 2 0.4 0Not Acceptable <70% 1 0.4 0

Weighted Cat Avg 4.3CommentsSurvey should be all temp "managers"

Survey should not be anonymous

"Received" survey for quality vs. minimum guidelines

"Selected" survey for work quality & quantity/efficiency, and hire-ability

Cost Competitiveness Continuous ImprovementMetric Act Score Weight Weighted

Base Pay Rates vs. Benchmark "Recruited"Superior Fav >=5% 5 0.25 0Excellent Fav <5% 4 0.25 0Good Parity X 3 0.25 0.75Needs Improv Unfav <=5% 2 0.25 0Not Acceptable Unfav >5% 1 0.25 0

Markup Rates vs. Benchmark (SSI Target = 30%)Superior Fav >3 BP 5 0.2 0Excellent Fav 1-3 BP 4 0.2 0Good Parity < 1BP Fav 0.5 3 0.2 0.6Needs Improv Unfav <3 BP 2 0.2 0Not Acceptable Unfav >3 BP 1 0.2 0

Pass-Through CostsSuperior Fav >=5% 5 0.05 0Excellent Fav <5% 4 0.05 0Good Parity X 3 0.05 0.15Needs Improv Unfav <=5% 2 0.05 0Not Acceptable Unfav >5% 1 0.05 0

CommentsBenchmark vs. previously paid on "recruited" talent

Cost of drug / background + other pass-throughs vs. competitors

Continuous ImprovementMetric Act Score Weight Weighted

Systems Upgrades / Process Improvements ImplementedSuperior Fav >=10% 11% 5 0.25 1.25Excellent Fav >5% 4 0.25 0Good Fav < 5% 3 0.25 0Needs Improv None 2 0.25 0Not Acceptable Unfav 1 0.25 0

Base Pay Rate Savings Methodologies ImplementedSuperior Fav >10% 5 0.2 0Excellent Fav >5% 4 0.2 0Good Fav < 5% X 3 0.2 0.6Needs Improv None 2 0.2 0Not Acceptable Unfav 1 0.2 0

Pass-Through Cost Methodologies ImplementedSuperior Fav >10% 5 0.05 0Excellent Fav >5% 4 0.05 0Good Fav < 5% 3 0.05 0Needs Improv None 0% 2 0.05 0.1Not Acceptable Unfav 1 0.05 0

Weighted Cat Avg 3.5CommentsValue assessment of upgrades to process / systems employed

Base Pay Savings measured by market rate before / after agency input

Pass-Through Savings vs. currently paying

An overall score is calculated and used to measure indirect suppliers’ performance

Indirect Supplier Evaluation Criteria

Indirect Supplier KPI Score

3.89

Weight X Score = Indirect Supplier KPI Score

• Weight = 30% • Score = 4

• Weight = 30% • Score = 4.3

• Weight = 40% • Score = 3.5

EXAMPLE

Contract Compliance

Customer Satisfaction

Cost Competitiveness and Continuous Improvement

Guidelines for developing KPIs

• Determine criteria for identifying which suppliers will be measured by KPIs

• What gets measured, gets done. Be clear on what you’re measuring and why.

• Develop jointly with suppliers to achieve buy-in

• Align KPIs with your goals and objectives

• Develop KPIs that are objective and measurable

• Limit KPIs to a manageable number

• Communicate results to suppliers and management on a timely basis

• Complete the process and follow-up on results and corrective actions

KPI Guidelines

Business Benefits• Generates supplier

improvements that benefit you

• Justifies supplier’s inclusion in your supply base

• Identifies need to re-source supplier

• Strengthens and improves supplier relationships

• Develops suppliers

• Rewards for performance

KPIs drive continuous improvement and cost savings

Questions