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Link Your Metrics to Your Business Strategy
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Traditional supply chain metrics focus on efficiency and productivity. Improvements in service levels, costs, and inventory levels are the desired outcome of an operations strategy and are measured accordingly. A more strategic perspective looks at these measures as enablers of business objectives such as growth within a specific segment or market, accelerated
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CHAPTER 5 Core Discipline 5: Use Metrics to Drive Business Success
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product development, or immediate product availability. When aligned with key business objectives, the supply chain becomes an added source of competitive advantage. For example, a leading maker of personal computer (PC) peripherals developed a business strategy focused on low cost, constant innovation, and a make-to-stock approach for fast order fulfillment. Each business unit was expected to manufacture at the lowest possible unit cost and have products available for shipment within two to three days of receiving a customer order. Supply chain metrics tracked on a regular basis included product cost, delivery performance, and fill rate. To compete based on cost, the company set up plants in locations with low labor rates and developed long-term contracts with carriers to ship the products by sea to local distribution centers. Although most of the manufacturing sites were in Asia, most of the company s business was in North America and Europe, so products took up to five weeks to reach the distribution centers. This made achieving the strategic objective of fast order fulfillment a major challenge. Accurate forecasting was critical but extremely difficult in the highly volatile peripherals market. And constant product introductions and phase-outs made it even harder. As a result, the company had to depend increasingly on flexibility within the supply chain. One of the few levers available was shipping products by air rather than sea. This nearly tripled transportation costs but was necessary to maintain customer service levels. The need to rework products to better align them with current demand when they arrived at the local distribution centers also boosted costs. The product managers didn t see these added costs as an issue: The transportation and rework costs appeared as expenses charged to the operations function. As such, they did not affect the product-cost metric. Of course, the total cost of managing the supply chain increased significantly because of these unplanned expenses. To address this problem, the management team began measuring total supply chain management costs on a quarterly basis (see Figure 5-1). The team also examined how the supply chain strategy affected costs related to order management, materials acquisition, inventory carrying, and planning not just the cost of goods sold. The management team worked closely with each product group to communicate the importance of total supply chain management cost. Product costs were still measured regularly, but the entire company was asked to focus on the new total-cost metric. As a result, product managers saw for the first time the huge expense associated with expediting shipments
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Strategic Supply Chain Management
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F I G U R E 5 1
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Components of total supply chain management cost.
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Total Supply Chain Management Cost
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Order Management
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New product release, phase-in, and maintenance Customer order creation Order entry and maintenance Contract/program and channel management Installation planning Order ful llment Distribution Transportation, outbound freight, and duties Installation Customer invoicing/accounting Materials/commodity management and planning Supplier quality engineering Inbound freight and duties Receiving and materials storage Incoming inspection Materials process and component engineering Tooling
Materials Acquisition
Inventory Carrying
Opportunity cost Shrinkage Insurance and taxes Total inventory obsolescence raw materials, WIP, and nished goods Channel obsolescence Field service parts obsolescence Supply chain nance costs Demand/supply planning costs Plan Product management Finished goods demand/supply planning Source Sourcing/materials acquisition Make Manufacturing planning and execution Deliver Order management Logistics and distribution Channel management Field service/support
Finance and Planning Management Information Systems (MIS)
Source: The Performance Measurement Group, LLC de nitions used in benchmarking studies
CHAPTER 5 Core Discipline 5: Use Metrics to Drive Business Success
because of forecast inaccuracies. This was the catalyst needed to move forward with a major initiative to improve the forecasting process, which greatly improved forecast accuracy and reduced reliance on supply chain execution to make up for planning errors. This example is not unusual. Measuring operational metrics in isolation is a common and often counterproductive way to use performancerelated data. A more effective approach is to start with your company s strategic goals and work backward to identify the supply chain performance metrics that support those goals.
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