Why and How to Measure Success in Supply Chain?

Vijay Sardana

Purchasing and strategic sourcing has become top-of-mind activity for the executives of the companies. Effective supply chain management has therefore emerged as a crucial as well as of strategic advantage for businesses. The increase of global business, cost of inputs and the surge of outsourced manufacturing have brought supply chain management to centre stage.

According to recent global survey, about 50 percent of senior executives around the world think that supply chain management to the company is ‘critical’ or ‘very important’.

Corporations today also rely on outside suppliers more than ever, and consequently, need measurements to determine if their supplier relationships are effective.

With greater importance comes greater scrutiny. For overall success of the organization the companies need hard data. It is important that companies use one or the other methodology to measure the performance of both the purchasing and supply activities within the company, and the performance of the supply base.

The following activities are extremely vital in any organization for any successful supply chain:

  • Supply chain efficiency management must be aligned with other strategic business units within the company, and with overall corporate goals;
  • It should be comprehensive, dynamic and aggressive;
  • It should be communicated efficiently throughout the organization;
  • It should be tied to performance-based initiatives to encourage good initiatives;
  • It should be backed by organizational resources to ensure commitment;
  • It should be supported by technology systems to ensure transparency and effective real-time monitoring, and
  • It should be led and championed by senior executives.

Cost savings is often the most important driver for companies implementing measuring systems. Companies are tapping into efficiency measures to remain competitive and improve margins. These include money spent per employee in purchasing, number of suppliers per buyer, percentage of sourcing done through electronic sourcing systems, and number of suppliers being used, among others. These parameters help in transparent picture of purchasing/sourcing effectiveness.

Strategic measures are also getting serious attention. They are however harder to quantify. Very often these measurements can be subjective, but they are vital.

Today companies have to also evaluate new ideas in supply chain to remain ahead in market place. Its impact on new product or new service development is important. It is also wise to remain proactive in bringing ideas from the supply base to the company. While doing so their impact on revenue generation should also be analyzed.

Companies that look at cost, efficiency, and strategic measures together gain a greater understanding of their supply chain and its overall impact on the organization. According to a global survey, No more than 10 percent of Fortune 500 companies have what one can call a world-class system – one that scores high on all dimensions. If not designed properly, such measuring systems can be cumbersome, time-consuming, and expensive to develop and maintain.

The common observation is that most of the companies employ some type of measurement system, but often it falls off pretty quickly and companies only doing a little bit of this and a little bit of that depending upon availability of resources, technology, comfort and management attitude. With poor measuring systems, organizations have difficulty in making right decisions and optimum allocation of resources.

Balancing Act is Vital

These companies can still reap significant benefits from improved measurement systems even if they do not have the same resources to devote to metrics as world-class organizations do. They should measure   the correct components and ensure that the measurements should reach up to a strategic level.

In order to achieve goals purchasing and supply must work closely with strategic business units in setting critical measures. One way to do this is by utilizing a “balanced scorecard”. Originally formulated by Harvard University researchers, the balanced scorecard embraces the idea that measures need to be holistic; they need to be about more than just financials.

In order to achieve a balanced scorecard four general themes guiding measurements for purchasing/supply departments, based on the company's overall strategic initiatives should be adopted. Example: One company uses finance, customer satisfaction, operational excellence, and innovation as its four key areas. Within those quadrants, employees are measured on key performance indicators: cost per case by product platform and market price vs. contract price (financial); number of defect-free shipments received (external customer service); management of strategic vendor relationships and improving use of raw materials (operational excellence); and meeting product launch milestones and percentage of sales volume achieved from new products (innovation). The balanced scorecard is one efficient method, but many approaches can work to customize the measuring system that it supports both the strategic goals of the organization, and its quest for increased revenue and shareholder return.

What is the future in Supply Chain management?

In today’s IT enabled and globalized world, the importance of efficient measurement systems increases. Improvements in technology can enhance current systems, improve workflow and data sharing, and cut down on the time it takes to produce the measurements.

The next phase is on-line Web technology allowing companies to access the right tools and see the metric information in a more comprehensive way. It is better way of collecting information and will help in establishing standards and data definition models for supply/purchasing measurements.

Also driving the popularity of measurement systems is the new money laundering laws and other financial reporting regulations. In today's banking, auditing and stock market regulation, financial data is picked very minutely and on real-time basis.

Availability of current and historical data on numbers on real-time basis is fast becoming a necessicity, both to have quick comparison by shareholders as well as for regulatory requirements. New regulations are forcing companies to have transparency in their processes. They need to have controls built in.

Measurement is central to all these activities, which needs monitoring and is foundation for all the regulatory activities. Without them, companies are open to all kinds of liabilities.

Illogical and unnecessary performance measurement parameters can be burden

Extensive measurement systems with lean staff can be a burden on the work force. Over-extensive i.e. beyond actual need, measuring systems can sometimes blur what companies focus on and frustrate or confuse employees.

Companies must avoid information-paralysis and have to be careful with data needs. It is very easy to get lost in the jungle of data and measurements.

Setting and communicating clear priorities is imperative. Managers should go to the field and evaluate how data is complied and stored. Sometimes data collection itself can be expensive with very limited use. Only hands-on experience can help in avoiding this gap between field teams and senior management.

Based on the global experience of many researchers, the pros outweigh the cons overall, but there is a crucial balancing act to maximize the gains, that is how much measuring makes sense.

Measurement outcomes may not be magic numbers for business but certainly pearls of wisdom for any company seeking greater efficiency in its supply chain through a comprehensive measurement system.

Real-time basis customized measuring system is the answer

The author of this article and a group of software professionals have developed a low cost, highly customized multi-location, multi-product and multi-variate software to measure various efficiency parameters in supply chain. ARPL-Integrated Analysis and Simulation Module (IDASM) can help any company in meeting data analysis needs in shortest time possible at a very affordable cost.   This software can be used to analyze the existing data of supply chain to ensure customized result on existing computers. The software is designed to avoid the need of highly skilled manpower. For more information on the software, you can visit http://www.arpl.in/analysis.php.

What precautions one should have while developing Measurement systems in supply chain?

  • Is measurement more important than actual work done? Can all this performance measuring occasionally get in the way of the actual work that needs to be done?
  • Are purchasing managers losing sight of corporate goals in the face of increased pressure to produce records?
  • How quickly it gets components from suppliers and manufactures at a low cost, does it eventually help in delivering on those promises?
  • Are vendors sensitive to efficiency needs as the company wants them to become. Where are the alternate suppliers?

 

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