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Is measuring supply chain performance really that important Absolutely. For starters, the right set of metrics can tell you how well each plan, source, make, deliver, and return supply chain process is performing, highlight where there s room for improvement, and help you to diagnose problems and decide where to focus your improvement efforts. Metrics also can be a powerful management tool by letting people know what is expected of them and allowing you to track progress or lack thereof over time. Supply chain metrics can be difficult to define and even more difficult to measure. At the highest level, supply chain operations are expected to contribute to a company s financial performance. Supply chain metrics,
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CHAPTER 5 Core Discipline 5: Use Metrics to Drive Business Success
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therefore, have three important objectives. First, they must translate financial objectives and targets into effective measures of operational performance. Second, they must do the opposite translate operational performance into more accurate predictions of future earnings or sales. Finally, they must drive behavior within the supply chain organization that supports the overall business strategy. Even if you don t measure nonfinancial metrics on a regular basis, you can be sure that your customers do. For instance, they ll take into account how good your service was on their last order when deciding whether to order again. This is just one way that nonfinancial performance metrics can be leading indicators of future financial performance. Measurement is the only way to understand whether process performance is improving or worsening and whether action is required. All too often companies learn about performance prob- Measurement is lems or the failure to meet stated objectives after the fact when revenues fall short of the only way to targets, customers take their business else- understand whether where, or margins fall below expectations. Our research and experience show process performance clearly that companies with good supply is improving or chain management skills have higher levels of process maturity that lead to better supply worsening and chain performance overall. They avoid the whether action is difficulties associated with steering by the rear-view mirror and can take steps to required. correct problems early before they become overwhelming. This chapter will examine the universe of supply chain metrics, their definitions, and the ones that apply to supply chain performance management. We ll also provide guidance on how to gain a comprehensive view of overall supply chain performance and pinpoint opportunities for improvement. It s important to draw the distinction between performance measurement and performance management. Performance measurement is about putting in place the right metrics to assess the health of your supply chain. Performance management uses those metrics to support your company s strategic objectives. Your metrics program is an effective management tool if it includes the following three activities on an ongoing basis:
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Strategic Supply Chain Management
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You integrate quantitative targets into plans and budgets. If cutting distribution costs is a priority, for instance, budget assumptions are adjusted to integrate the specific cost-reduction targets. You establish meaningful targets at the individual and departmental levels that link to overall corporate objectives. For example, if you plan to drive lower delivery costs, a distribution center s targets might aim for a lower percentage of express versus standard deliveries. To track process changes, you might measure the adoption rate of new practices that drive lower premium freight costs, such as adherence to order cutoff times. You have well-defined mechanisms and processes in place for tracking progress and managing performance. Performance exceptions are identified easily and drive appropriate actions that involve the right individuals and organizations in a timely manner.
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To make these activities a regular part of your company s supply chain management process, you ll first need to define an approach to supply chain performance management. We ve found that the most effective approaches share these characteristics:
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Supply chain metrics are linked to the business strategy. Supply chain metrics are both balanced and comprehensive. Targets are set based on both internal and external benchmarks. Targets are aggressive but achievable. Metrics are highly visible and monitored at all levels of the company. Supply chain metrics are used as a continuous improvement tool. Metrics are implemented via a formal implementation plan.
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