Continuous performance improvement is the goal of every supply chain. We seek to consistently move product from origin to destination as quickly, inexpensively, and safely as possible. These goals are achieved by eliminating errors, minimizing disruptions, and reducing variation in transportation, storage, and order fulfillment processes.
Conceptually, this is easy to understand but challenging to execute perfectly, according to supply chain professionals I recently interviewed. Supply chains involve numerous, geographically dispersed operations that are at risk of delays and problems. Thus, we must continuously monitor performance, quickly diagnose problems that arise, and effectively respond with corrective actions to regain control if supply chain processes go awry.
It Starts With the Right Metrics…
Ask performance improvement experts about achieving better results, and the conversation invariably concludes with the statement that improvement can’t happen until you know how well a process is performing. Along this line of thinking, quality guru Dr. H. James Harrington famously stated, “Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.”
Supply chain professionals have two primary performance improvement roles. First, they are responsible for maintaining product quality and integrity. Second, they must promote inventory availability and an efficient, continuous product flow to the marketplace.
Given these goals, what are the relevant key performance indicators (KPIs) that must be used to create supply chain control and improvement?
Steve Roosdahl, Corporate Supply Chain Manager for The Oppenheimer Group, advocates a focus on customer-facing metrics. He states, “The most important metrics to monitor are the customer requirements: product quality, on-time delivery, and order accuracy in terms of units and product quality versus specifications.”
KPIs must promote supply chain precision, notes Bill McBeath, Chief Research Officer at ChainLink Research. End-to-end transit time must be minimized, and deadlines must drive operations.
Michael McCartney of QLM Consulting highlights the importance of inventory management metrics. KPIs related to days of supply being held, inventory turns, and inventory shelf life all should be monitored and targeted for improvement. Related distribution metrics such as inventory accuracy and fill rates are highlighted in the annual WERC/DC Velocity study.
Ron Hansen, Vice President of Warehouse Operations and Logistics for Coast Produce, highlights the need for KPIs related to visibility, traceability, and electronic trading activity.
Choosing the right quality, service, and cost KPIs for your supply chain processes will set the stage for success. It is also important to clearly define your metrics—their purpose and meaning, how they are calculated, and target levels of performance. This information must be communicated to supply chain partners. “All parties will benefit greatly from taking a few minutes at the outset to make sure there is a high degree of clarity about how performance will be measured and managed,” says Marianne Timmons, former Vice President of Supply Chain Strategy for Wegmans Food Markets.
…Then the Metrics Are Analyzed…
After KPIs are defined and a data collection mechanism established, capturing performance data is relatively straightforward. The challenge is deciding what to do with the data. Unfortunately, technology makes it all too easy to inundate people with spreadsheets, charts, graphs, and reports. If they don’t know how to use these KPI measurement outputs, then little will be done to bring performance under control or improve it.
The way to overcome the avalanche of data is to employ the “measure what matters” principle. Avoid the tendency to burden supply chain partners and your employees with the task of collecting too much data. If a metric doesn’t impact results, it’s not truly a KPI. And make sure to use a cohesive set of metrics to understand performance, notes a recent Accenture study.
Numerous analytical strategies are available to monitor KPIs, pinpoint and troubleshoot problems, and reestablish control over the affected supply chain processes. A simple strategy is to use a simple red/yellow/green light system to monitor performance. This is an exception-based system that responds only when problems occur. If the process is performing within acceptable parameters, it is green lighted and left alone. An infrequent performance problem or trend will trigger a yellow light and the process will be monitored. Reoccurring readings outside the acceptable readings will trigger a red light. Action is taken to diagnose the problem and bring the process back into control.
A more advanced analytical method is a scorecarding system. Scorecards help companies develop and maintain key reports on the cost and quality of services rendered by supply chain partners. They can also be used to monitor internal processes. These key reports provide a collective assessment of performance for a relevant set of KPIs.
Scorecards are typically standardized by supply chain process and individual results indexed to a target score, allowing effective comparisons of similar suppliers to be made. For example, a transportation scorecard would assess each carrier’s ability to meet key service requirements (such as damage rates, on-time delivery percentages, and billing accuracy). The results could also be used to rank the carriers. Figure 1 provides a sample transportation scorecard that uses a weighted point plan.
“At the end of the day, the effectiveness of any scorecard initiative is completely dependent on the people within the relationship being committed to the partnership and the process of continuous improvement,” states Timmons.
…and Goals Are Achieved
Supply chain performance improvement doesn’t occur overnight. Achieving consistent, controlled performance requires a concerted effort on the part of all partners in the supply chain. It also helps to take a holistic approach such as the Six Sigma DMAIC (Define-Measure-Analyze-Improve-Control) method of continuous performance improvement. The DMAIC process, highlighted in Figure 2, helps companies identify problems, implement solutions, and make progress toward goals.
“You need a strong checks and balances system,” says Shane Towne, Director of Business Development for Indianapolis Fruit Company. “If there is an issue or problem, we have to investigate it, track down the cause, and rectify the situation immediately. We want to resolve a problem before the next order goes out.”
Ultimately, the effort involved in choosing appropriate KPIs, establishing effective analytical processes, and taking well-targeted corrective actions will be rewarded. Disruption-free product flows will be achieved, resulting in greater product safety, brand protection, and profitability.
This whirlwind trip through the world of KPIs and supply chain improvement barely scratches the surface of these critical topics. For deeper insights, check out the numerous Supply Chain Academy courses on performance management in procurement, transportation, inventory, and warehousing.