think beyond !! supply chain metrics in digital world

think beyond!

Supply Chain Metrics in the Digital World!

Conventionally all of us have seen supply chain metrics centered on cost and service parameters. A few forward thinking organizations add revenue and assets efficiency related metrics. A lot of efforts are put in developing and running them. However after all this, CXOs still find it a challenge to see how supply chain played a role in achieving the organizations’ objective. So where does supply chain function go wrong?

Supply chain functions lacks in both, having the right metrics and also in prioritizing them to the organizational objectives. The question is to find out the mechanism to design metrics that will add value to the organization?

Let’s first take a brief look at the prominent business trends that are making it imperative to have a solid performance measurement mechanism in supply chain.

Key Business Trends:

We often hear about disruptive business models these days. Let’s face it: the life cycle of business models is continuously shrinking. Organizations’ identified economic value used to last for years if not decades. The incremental business expansion done through product line extension, new geographies and complimenting target group are necessary but in no way sufficient to survive in this new age business scenario. Business models are now subject to rapid disruption and sometimes outright destruction. Consider a few examples: UBER vs. traditional taxi eco-system, Amazon vs. Wal-Mart, Apple vs. Nokia.

While all this is in play, cost and service hygiene are assumed to be in place. There is no second thought on that. Whatever new models you bring in, the element of cost and service will still continue to have a significant role.

Business risk has been incremental all throughout. Apart from the well known risks such as natural disasters and terrorism, very well informed and connected consumers are also a form of business risk which should be planned well.

Digital is the name of the game. Efficiency is now elevated to Intelligence. Companies are therefore building flexibility and embedded intelligence directly into the supply chain processes to help them adapt quickly to changing needs.

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These trends have made an impact on organization’s operating model. New sales channels such as eCommerce are evolving, routine and transactional activities are getting outsourced or centralized, asset free model are emerging, and vendors are becoming stakeholders. Change in operating model has made the job of a supply chain manager far more complex. While the activities performed in procurement, manufacturing and distribution needs to be efficient and effective, there is a need now to think beyond. The performance metrics like Forecast Accuracy, Wastages, Costs, Capacity Utilization are important however these are still inner looking metrics. These metrics are more focused towards bringing in organizational efficiency and effectiveness. The survival and growth is critically dependent on having an outside-in perspective. Outside-in comes by keeping customer and overall organizational in the spotlight. If not adapted to the contemporary times, supply chain function runs the risk to business from being enabler to disabler!

From key metrics to value metrics In every successful company, the value proposition is developed based on their most differentiated capabilities: the processes and products it has learned, developed, optimized over time. Value proposition can be around innovation, customer experience, technology leader, cost player. Functional heads play their own role in developing and maintaining these capabilities. We often encounter various functions lacking their understanding around organizational objectives and value proposition. You need a clear understanding of the company’s value proposition and the required functional capabilities to fulfill it. To start, divide all the capabilities that your function provides into three broad categories:

1. The Process Hygiene: The capabilities needed to keep the company running. E.g. order to delivery cycle time, batch size, OEE, capacity utilization. They are critical but non-differentiating. They should be tightly controlled for efficiency, and often automated, outsourced, or relegated to low-cost shared services, thus freeing up resources that functional leaders can redirect to differentiating capabilities.

2. Competitive Necessities: Enables a company to compete in its industry. E.g, logistics sourcing, direct and indirect cost, returns cycle time, inventory turns.

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3. Value Based Differentiators: Provides a company with the distinctive advantage needed to outperform competitors. Most of these capabilities are cross-functional. E.g. New Product Sales Contribution, SC Cycle Time, Market Share.

Supply chain departments are generally seen to be in a fire fighting mode always. The people are so occupied that they hardly find any time to look beyond the process hygiene phase. A logical thought should be given on the core reasons behind these daily struggle to see how can you possibility reduce the workload by making a few changes in your operating model. For instance the routine activities can be centralized, automated or even outsourced. You may have to gradually shift from a mere operational orientation where your role is to fulfill every request to a more Value based approach.

Once you are clear on the organization’s objectives, long terms strategy, value proposition and your department’s role in adding value, you can now take the following steps – 1. List down all the relevant supply chain metrics 2. Classify the metrics by process and type – a. Strategy, Plan, Source, Make, Deliver and Return b. Process Hygiene, Competitive Necessities and Value Based Differentiators 3. Define the formula, targets, measurement frequency and owner 4. Identify and implement the relevant tool to automate the KPIs data capture and reporting It is not possible to be best in class in everything. We see many firms having as many as 100 metrics and wanting to excel in all of them. It’s a recipe for disaster. You can use this broad framework of metrics classified with metrics type on Y axis and stages of supply chain on X axis.

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A few guiding principles should be kept in mind while developing this framework – 1. Metrics and respective targets have to be created in alignment with the overall organizational objective 2. Create a leaner list of metrics 3. The number of KPIs will substantially reduce at each stage of elevation from Process Hygiene to Value Based Differentiators 4. Value Based Differentiator metrics should have measurable and more than the regular incremental impact 5. Metrics should have stakeholders’ validation It is very important to maintain a correct balance between having very low focus on the performance metrics to having an excessive focus. There is a very popular saying that, “What gets measured gets managed” but it is important to note that, “Everything that can be counted doesn’t necessarily count”. It is important to have metrics but it is even critically important to have right metrics.

Author: Haresh Panjavani Managing Consultant - Capgemini Consulting Email: haresh.panjavani@gmail.com

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