TLS013 Supply Chain Key Performance Indicators (KPIs) and Performance Measurement Ehap Sabri, PhD, CFPIM
Agenda What is KPI? Performance Measurement Challenges Performance Measurement Framework Best practices to identify the right KPIs Best practices to establish continuous improvement Best practices to track the KPIs and Metrics Best practices to establish governance Questions & Closing Remarks
JDA Strategic Services Who we are and what we do A global, cross-industry and cross-functional team of senior-level executives with deep domain experience, backed by top-level analysts and problem-solvers, bringing leading-practice experience and real bottom-line results to every customer. Industry titles our team has served in: Domain Expertise Retail Category Mgmt Process Mfg Discrete Mfg Supply Chain Optimize Svcs President Executive Vice President of Merchandising General Merchandise Manager Chief Financial Officer Vice President of Planning & Allocation Director of Retail Business Intelligence Director of Merchandise Planning Materials/Logistics Supervisor Director of Business Intelligence Director of Merchandise Systems
JDA Strategic Services Offerings to meet your business needs Opportunity Assessment Business Diagnostic Impact Assessment Design a results-based implementation plan Optimization Services Solve a particular problem within the supply chain Upfront process improvement and KPI definition Business Transformation Roadmap of people, process and technology changes Quick & comprehensive assessment of the implemented JDA solution(s)
Agenda What is KPI? Performance Measurement Challenges Performance Measurement Framework Best practices to identify the right KPIs Best practices to establish continuous improvement Best practices to track the KPIs and Metrics Best practices to establish governance Questions & Closing Remarks
What is a KPI vs Metric vs Report? A metric is created using one or more reports. Not every report is used in a metric. A report or several reports to be qualified to become a metric must: Have context and target Be based on legitimate data Lead to action or improvement KPI is a metric but a metric is not necessarily a KPI A company or department might track 50 metrics but they consider 5 out of 50 as their KPIs based on the current corporate goals and objectives A Metric to be qualified to become a KPI must: Support organizational goals/strategy Be accepted by upper management Have a meaning at all lower organizational levels References: http://itsm.certification.info/metrics.html http://activemetrics.wordpress.com/2008/02/06/kpi-vs-metric/
Parameters of KPIs/Metrics 1. The category and scope of the measure (KPI/Metric) that is being addressed (like customer satisfaction for demand fulfillment process) 2. Performance target that represents an external focus (e.g. developed by benchmarking) and internal focus to achieve certain corporate goals (e.g. developed during internal strategic planning sessions). This target needs to be reviewed and adjusted regularly 3. Actual performance value which requires a system to capture it and save it. This should include the time period of the value 4. Owner of the performance measure who is accountable for success or failure of the measure 5. Set of action plans when target is not achieved Reference: 1. Ehap Sabri et al. Lean & Agile Value Chain Management: A Guide to the Next Level of Improvement, J. ROSS PUBLISHING, January 201 0
Agenda What is KPI? Performance Measurement Challenges Performance Measurement Framework Best practices to identify the right KPIs Best practices to establish continuous improvement Best practices to track the KPIs and Metrics Best practices to establish governance Questions & Closing Remarks
Performance Measurement Challenges 1. The widespread feeling among managers is that they either measure too much or too little, or the wrong metrics 2. Lack of clear ownership for KPIs/Metrics 3. Isolated metrics 4. Unstructured Governance for Tier 2 Metrics and root cause analysis/corrective action 5. Lack of clean consistent data 6. Difficulty in understanding of root causes if targets are not achieved 7. Firms need to create and measure an environment that is both lean and agile, one that honors the principles of waste elimination while also enabling the flexibility to deal with the variability and unpredictability
Agenda What is KPI? Performance Measurement Challenges Performance Measurement Framework Best practices to identify the right KPIs Best practices to establish continuous improvement Best practices to track the KPIs and Metrics Best practices to establish governance Questions & Closing Remarks
Best Practice Framework for Performance Measurement e2e Process Metrics GLOBAL, KPIs/Metrics Global definitions Plan Accountability Metrics OWNERSHIP Root Cause Analysis Playbooks Centralized Analyst Teams Scorecard, Dashboard System SYSTEMATIZED Clean consistent data Automation SCM KPI Governance Process/Model FORMALIZED GOVERNANCE Weekly, Monthly Forums Structured reviews
Best Practice Framework for Performance Measurement 1 Define KPIs that establish how e2e process is performing Lean & Agility Process Metrics Plan Accountability Metrics 2 Define Analysis paths and ownership metrics that drive alignment and clear accountability across organizational functions Scorecard, Dashboard System 3 Implement a system that will create the dashboards on a periodic/as-needed basis SCM KPI Governance Process/Model 4 Establish a governance process to set targets, review performance and take actions 12
Key Considerations for KPIs Definition KPIs need to be aligned to corporate strategy and objectives Focus on a handful of KPIs that are most critical to the business Finalize the parameters (like formula and targets) for every KPI Avoid the 7 deadly Sins (Mistakes) in defining KPIs/Metrics
Strategic Business Goals (Template Sample) Corporate Strategic Objectives & Goals Improve Revenue Goal:: increase compounded annual growth rate (CAGR) by 10% Increase Customer Satisfaction Goal: 8 out of 10 on the annual Customer Survey Increase Margin Goal: 10% increase Strategies & Tactics Related to Supply Chain Align Sales strategy with Planning, Purchasing and Inventory strategies (thru SIOP mechanism) Improve Delivery Performance Create Network & Inventory Strategy Establish supplier score card portal Achieve cost saving thru improving PPV Proposed KPIs Forecast Accuracy Net Sales ($ /Units) Order Cycle Time Customer Requested Date (CRD) Delivery Performance Distribution Cost Transportation Cost Inventory Turns
7 deadly Sins (Mistakes) in Defining Metrics 1. Vanity: is to use metrics that will inevitably make the organizations and its managers look good and get their bonuses. 1. For example, firms often measure against latest promise date (the final promise date to the customer) 2. Provincialism: is allowing organizations to be measured only based on what they own or fully control, which results in sub-optimization and conflict. 3. Narcissism: is defining metrics based on one's own point of view, rather than from the customer's perspective. 4. Laziness: is defining metrics without giving it adequate thought or effort. 5. Pettiness: is defining a partial list of metrics which leads to measuring a small component of what matters. 6. Inanity: is defining metrics without giving any thought to the implications of these metrics on employees behavior and company performance. 7. Frivolity it is not being serious about metrics in the first place. It is the most serious sin of all. References: Hammer, M. (2007). The 7 Deadly Sins of Performance Measurement [and How to Avoid Them]. MIT Sloan Management Review, 19 28
Best Practice Framework for Performance Measurement 1 Define KPIs that establish how e2e process is performing. Lean & Agility Process Metrics Plan Accountability Metrics 2 Define Analysis paths and ownership metrics that drive alignment and clear accountability across organizational functions Scorecard, Dashboard System 3 Implement a system that will create the dashboards on a periodic/as-needed basis SCM KPI Governance Process/Model 4 Establish a governance process to set targets, review performance and take actions 16
Key Considerations for Root Cause Metrics Define Analysis paths and ownership metrics that drive alignment and clear accountability to metrics across organizational functions. They are also called Tier 2 or root cause metrics Conduct root cause analysis on a regular basis leveraging captured available metrics to enable this analysis Finalize the parameters for every Metric It is acceptable to update root cause metrics if the business changes or certain assumptions become invalid
KPIs/Metrics Landscape (Template Sample) Financial Benefits Buckets : 1) Cost Reduction, 2) Revenue increase, and 3) Margin Increase 1) Net Sales (Revenue) 2) Distribution/Warehouse Costs 3) Transportations costs Lean Agility Operational Excellence Assets Optimization Responsiveness Reliability Flexibility 4) Forecast Accuracy (30, 60, 90,120 days out) 5) Inventory Turns 6) Order Cycle Time 7) CRD on time Delivery Performance Operational Metrics (Process Compliance/root causes analysis) Forecast Accuracy System Forecast Accuracy Unconstraint Forecast Accuracy Constraint Forecast Accuracy at category level Key Customers Forecast Accuracy Life Cycle (Annual) Volume Target Achievement Percentage of trained people on the process Days of Supply (DOS) DOS at all locations (and related stockout, low inventory, and excess issues) DOS by category DOS for Raw Material Inventory Quality Ratio Aged inventory Forecast Accuracy Capacity Utilization FG Supplier Fill Rate FG Supplier Delivery Performance Total Inventory Cost Order Cycle Time Supplier cycle time Carrier cycle time New product development time Order Fulfillment Time Type of Replenishment Days of Supply at all locations Forecast Accuracy CRD on time Delivery Performance CRD delivery performance for MTO CRD delivery performance by category Fill Rate FG Supplier Fill Rate Plant Schedule Compliance Production Efficiency 3 PL delivery performance Warehouse Delivery (shipment plan compliance) performance
Best Practice Framework for Performance Measurement 1 Define KPIs that establish how e2e process is performing. Lean & Agility Process Metrics Plan Accountability Metrics 2 Define Analysis paths and ownership metrics that drive alignment and clear accountability across organizational functions Scorecard, Dashboard System 3 Implement a system that will create the dashboards on a periodic/as-needed basis SCM KPI Governance Process/Model 4 Establish a governance process to set targets, review performance and take actions 19
Key Recommendations for Effective Tracking Implement a system that will create the dashboards on a periodic/as-needed basis to sustain KPI tracking Assign a dedicated person or a team to review the quality of data and publish the data Frequency of capturing and communicating, and the cost of capturing the data should not out-weigh the value of it
KPIs/Metric Tracking (Template Sample) KPI /Metric Description / Formula Baseline 2012 Target Granularity Value (for this review cycle) Owner (for capturing and publishing) Data refresh Frequency Forecast Accuracy (120 days out) (1- WMAPE). WMAPE is defined as the average of percentage errors. Captured 6 months out 30% 50% Part-Customer- WH 33% Monthly Inventory Turns Cost of goods sold divided by average inventory Perfect Order The percentage of orders 1) delivered "on time and in full" to request date AND/OR to commit date; 2) that meet the customer's 3 way match (invoice, PO, and receipt); and 3) have no product quality issues CRD Delivery Performance Actual delivery date compared to customer requested date
Best Practice Framework for Performance Measurement 1 Define KPIs that establish how e2e process is performing. Lean & Agility Process Metrics Plan Accountability Metrics 2 Define Analysis paths and ownership metrics that drive alignment and clear accountability across organizational functions Scorecard, Dashboard System 3 Implement a system that will create the dashboards on a periodic/as-needed basis SCM KPI Governance Process/Model 4 Establish a governance process to set targets, review performance and take actions 22
Key Considerations for Establishing Governance Establish a governance process to set targets Establish governance to review performance and take corrective actions Finalize the review meetings and format Come up with predefined corrective actions (process playbook) when metrics targets are not achieved
KPIs/Metric Governance (Template Sample) KPI /Metric Audience Venue Delivery methodology Audit & feedback Corrective Action Owner (for corrective action) Forecast Accuracy (120 days out) Executives, SC EVP, SC VP, SC director, OM, CDC, supply planning, transportation, PLMs, Account mangers, external customers S&OP, Operation review meeting, customer performanc e reviews On line Reports with stop light status Inventory Turns Executives, SC EVP, SC VP, SC director, OM, CDC, transportation, PLMs, Account mangers Operation review meeting On line Reports with stop light status Perfect Order Executives, SC EVP, SC VP, SC director, OM, PLMs, Account mangers Operation review meeting, On line Reports with stop light status CRD Delivery Performance Executives, SC EVP, SC VP, SC director, OM, PLMs, Account mangers Executive dashboard, Operation review meeting On line Reports with stop light status
Some Definitions for KPIs/Metrics Parameters KPI Baseline Audit & Feedback Corrective action Audience Venue Delivery Methodology Granularity Refresh Frequency Definitions Baseline is the initial performance level or beginning measurement for a specific KPI and used to audit ongoing performance Who is responsible for auditing, and the method used to provide feedback on performance In the event the KPI does not improved as planned, describe the remediation process for identifying probable causes (e.g. not enough training) and putting an action plan into place to correct the negative KPI impact factors Describe who is responsible for the KPI performance and who will benefit from KPI improvements (it should include the owner, person who is responsible to conduct root cause analysis, and the person who will capture or create the metrics) Describe the situation under which the KPI will be used. (e.g., as part of an Executive Dashboard, in support of Supplier review, as part of the S&OP process) Describe how the collected KPI data will be presented to the audience (e.g. Report, Online Page, Monitor, Exceptions) Describe the level of detail required to support the KPI on key dimensions (e.g., if there are three dimensions (product, location and time), specify desired level for each dimension (examples would be Item/All in weekly buckets, Item/Store in monthly buckets, All/Region in quarterly buckets, if there were three dimensions)) Describe how frequently data will be collected on the KPI (e.g. weekly, monthly, biannual)
Questions?
Closing Remarks What gets measured, gets improved Old Say The real challenge today is unlearning, which is much harder than learning. Each of us has a mental model that we ve used to make sense of the world; but the new world of business behaves differently from the world in which we grew up. Before any of us can learn new things, we have to make our current assumptions explicit and find ways to challenge them. John Besaw What I hear I forget, what I see I remember, what I do I know Chinese proverb
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