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If you plan to use metrics to determine how your supply chain is performing, you must set a target for each metric. Only a target gives you a basis for tracking whether performance is improving, holding steady, or getting worse. Don t aim to be best at everything no company can excel at every key metric. Unattainable goals are more likely to result in behaviors that disrupt rather than enhance a company s performance. Instead, start by agreeing on your overall strategic objectives, and acknowledge that previous targets may not align with those objectives.
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Strategic Supply Chain Management
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Typical supply chain scorecard.
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Performance Versus Comparison Population 0 20% Major 20 40% 40 60% 60 100% Your 60 80% Opportunity Disadvantage Median Advantage Best-in-Class Org. 82.1% 91.1% 7.9 97.3% x 99.2% 2.4 96.3% 92.8% 11.0
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Metric On-Time Delivery to Request % On-Time Delivery to Commit % Order Ful llment Lead Time (OFLT): Primary Manufacturing Strategy (days) Upside Production Flexibility: Principal Constraint (days)
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InternalFacing Metrics
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Total Supply Chain Management Costs (% of revenue) Total Returns Processing Costs (% of revenue) Inventory Days of Supply Cash-to-Cash Cycle Time (days) Net Asset Turns Your Organization
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10.3%
4.7%
6.9%
0.9%
0.2%
66.6%
64.2 76.3 2.0
23.6 22.3 9.1
39.0 43.6 5.9
Copyright 2004 The Performance Measurement Group, LLC
We noted earlier that a balanced set of metrics is critical to an effective performance-management program. The same is true for performance targets. While optimizing supply chain performance isn t a zero-sum game a performance improvement in one area doesn t have to be at the expense of another it s true that to reach a target in one big area, you might have to accept a lower metric in another. It s also true that you can improve the performance of numerous parts without improving the performance of the whole an idea that can be hard for companies to grasp. Sometimes compromises at the functional
CHAPTER 5 Core Discipline 5: Use Metrics to Drive Business Success
level are needed to improve overall performance, but this can be a bitter pill to swallow for managers of those functions: It may appear that their own performance is declining. There are many ways to set performance targets. Perhaps the simplest is to develop specific percentage-improvement goals based on historical and baseline performance. With this method, you simply measure performance in a specific area over a specified time period, determine the baseline, and set a target for improvement. But be sure to link the target to a specific change in strategy or execution. Too often targets are based on the assumption that because a certain level of performance is possible as indicated by benchmarking data it is a logical, attainable goal. For example, a telecommunications equipment company was dissatisfied with the service its key suppliers were providing and embarked on a program to improve supplier on-time delivery. The company measured the performance of 25 key suppliers over a three-month period and found that on-time delivery ranged from 70 to 80 percent. It then set an objective of achieving average on-time delivery of 95 percent for these key suppliers within six months. After six months, supplier performance hadn t improved noticeably. The manager of the procurement group explained that the 95 percent target wasn t tied to any specific program. The company had just assumed that improving performance by about 5 percent per month was a reasonable goal. Later, after benchmarking delivery performance within the telecom industry, the company found that the top performers were achieving supplier delivery performance of only 87 percent. Using these data, the company set a long-term goal of 95 percent but also set interim targets tied to specific practices shown to be lacking by the benchmarking program. These included the use of joint service agreements, increased use of electronic data interchange (EDI), and upgraded supplier certification programs. We advocate setting stretch targets, but we also caution against setting unrealistic goals, which can hurt morale and breed cynicism. The best approach is to combine historical analysis and baselining with internal and external benchmarking and in some cases an assessment of what is realistic given specific business conditions and planned process improvements.
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