Improving Order Execution Performance: A Holistic View of Metrics Across Plant & Warehouse

Improving Order Execution Performance: A Holistic View of Metrics Across Plant & Warehouse Julie Fraser, Cambashi Karl Manrodt, Ph.D., Georgia Southern University Kate Vitasek, Supply Chain Visions

Table of Contents Executive Summary... 3 About the Study... 4 The Emerging Pressure on Performance... 5 Metrics Linkages and Conflicts... 6 The Foundation... 7 The Future... 8 Framework for the Fix... 9 Order Fulfillment... 10 Mass Customization and Flexibility. 11 Inventory Management... 12 Execution Productivity... 14 Quality and Compliance... 13 Business & Financial... 15 Toward Holistic Execution... 16 Appendix. Harmonized Joint Metrics... 17 About the Authors... 20 About the Sponsors... 21 2

Executive Summary Executive interest in performance metrics is high, yet companies often don t achieve the results they want. One of the most common causes is that companies are not taking a holistic view of performance and harmonizing metrics across all of their functions often treating manufacturing and distribution as separate functional silos. As a result, people in each function work to optimize performance against core metrics or key performance indicators (KPIs) they are responsible for in just one facility. The result often is that a company s internal supply chain has conflicting goals and metrics, such as keeping inventory low in the inbound warehouses but asking plants to be ready to ramp up to meet demand on an array of different products quickly. Unfortunately, when core functions such as inbound materials, production, and outbound distribution are not working in harmony, overall company performance suffers. Beyond conflicting metrics, many companies have not standardized metrics across facilities, or even departments. Often the metric may sound the same but have a different definition or calculation in each facility. For example, there are many ways to measure on-time shipment: the variables include customer requested date versus promised date and whether it is measured from the time a product is ready to ship, on the dock, or actually loaded into the carrier. This inconsistency can lead to sub-optimal management decisions. This paper is the first result of a collaborative effort between four industry associations to help create a framework for member companies to develop holistic metrics across both plant and warehouse execution. This paper highlights some of the pressures companies face today and specifically some of the conflicts and mismatches many companies suffer in their performance metrics. It also outlines a framework for creating more harmonized and holistic views of performance across the execution functions in a supply chain. This is the first plank in the foundation these organizations are laying for performance metrics to better enable those in the plants, warehouses, and distribution centers to meet company goals. 3

About the Study Manufacturing Enterprise Systems Association (MESA International), the Material Handling Industry of America 1 (MHIA) and the Warehousing Education and Research Council (WERC) have joined forces to research a common issue across today s businesses standardizing and defining performance measures between plant operations and distribution and warehousing functions. The four sponsoring organizations are combining their members collective knowledge to lead the industry towards more useful and harmonized operations performance metrics. The goal of the joint working group is to help companies understand common measures of production and warehouse execution that should be used across companies to help prevent functional sub optimization. An added benefit to members will be the ability to benchmark their operations with peers, knowing that all involved are using standardized metrics. This paper is the first result of a collaborative effort among four industry associations to help create a framework for holistic metrics across both plant and warehouse execution. The initiative involved a team of subject matter experts from each organization that came together to indentify common metrics impacting both manufacturing and warehousing. So far, the team has identified approximately 50 joint metrics in six major categories: order fulfillment, flexibility, inventory, productivity, quality & compliance, and financial or business metrics. These appear in the Appendix. A critical step in benchmarking is creating standard definitions and calculations for each metric. A key goal was the standardization of the definitions and calculations across all four organizations. Within each of the six categories, the team identified and created standard definitions and calculations for each metric. This work has allowed MESA, OFC, SCE and WERC to lay the foundation and framework to move toward a more holistic view of how they and their members measure performance across plants and warehouses. Phase 2 of the project, which begins in 2009, will involve the launch of an annual survey to understand how companies measure their operations performance. This study will also benchmark performance against metrics in each of these categories. This study will be the first of its kind to focus on benchmarking common metrics across various functions. The results of the study will help companies know how they are performing and will provide companies with critical benchmarking data that can be used to drive overall operational performance improvements. 1 The Order Fulfillment Council (OFC) and the Supply Chain Execution Systems & Technologies Group (SCE Group) are part of the Material Handling Industry of America (MHIA) trade association. 4

The Emerging Pressure on Performance Despite operational excellence programs, performance improvement and measurement efforts often stay within the four walls of each facility and in some cases just the department. In part, this is a legacy of local control in many production plants and warehouses or distribution centers. As a result, inbound and outbound logistics often do not work together effectively with production. Plant and warehouse metrics may even put facilities in conflict. For instance, the key metric for a plant manager may be throughput. To meet this goal, lot sizes are large, regardless of demand, to minimize change-over costs and maximize throughput of the product. If the warehouse manager s key metric is inventory turns, he or she will be frustrated. They will always be performing suboptimally, through no fault of their own. This situation is not sustainable. Pressure is mounting on companies financial performance that is now rippling down to create changes to this long-standing local rule. Executives now want to see a holistic view of performance across all facilities. Perhaps more critical, to compete effectively manufacturers must achieve efficient and effective operation in business processes that involve a complex network of facilities. Competition, customer choice, rising energy costs, and increasing materials costs put pressure on everyone. To succeed, companies are focused on getting the most from their plant and warehouse assets. One way to do that is through metrics. Measuring operational performance is certainly established practice in plants and warehouses. In fact, a recent WERC study revealed that senior managers are more and more interested in performance metrics, as shown in Figure 1. Source: 2007 WERCwatch Figure 1: WERCwatch 2007 shows that interest in performance measures is growing among most senior managers. 5

Metrics Linkage and Conflict Relying on functionally or facility focused measures alone can lead to a sub-optimized supply chain. Some obvious examples of metrics and goals that create conflict between plants and warehouses are shown in Figure 2. Figure 2: Today, many goals and metrics ensure that plant and warehouse personnel are pulling in opposite directions. Global competition means pulling together is imperative to success. In many cases, even if facilities are pulling together, enterprise goals may require new prioritization of metrics. Some of the conflicts between corporate and site personnel come from product and solution innovation, globalization, and industry networks of trading partners. Examples include: Percent of revenue from new products (or daily mix) vs. execution costs per item. Clearly, variety from new products drives extra costs in facilities as they learn how to best produce and handle those products. Changeover costs in the plant and picking costs in the warehouse are both hurt by excessive mix. Procured material costs vs. order cycle time. Today, strategic sourcing usually means low-cost country sourcing. If the warehousing and production facilities that receive these are located in the developed world, the shipping time for raw materials inventory can create a lag time that no amount of execution efficiency can counteract. Lower assets via outsourcing vs. consistent quality. Many companies strategies for outsourcing have resulted in a loss of control over the practices in place. Companies must balance their desire to reduce asset base with a requirement to ship high quality product that customers will continue to buy. Relying on functionally or facility-focused measures alone can lead to a sub-optimized supply chain. 6

In all of these conflicting situations, there is not one right answer. Companies must work across departments and across sites to ensure that the proper balance and priorities cascade down from corporate strategy to operating units to sites. Some of the metrics that a facility has used as long as anyone can remember may need to be scrapped in favor of new ones. Corporate expectations of performance gains year-on-year must take strategic realities into account. In fact, it s important to treat this not as a one-time analysis, but part of the annual planning and target-setting process. As strategies, market conditions, and execution capabilities change, the priorities for the operation will as well. The companies who are able to adjust their business models and their performance metrics to new realities on an evolving basis will be best positioned to succeed. The Foundation At the heart of being able to resolve the conflicts within and among organizations is the need to speak the same language. In the world of performance management this means having common definitions and calculations for metrics. A key part of our research was reviewing the various definitions and calculations that are currently being used. To do this, the research team began with examining the metrics and associated definitions and calculations from various thought leading organization that focus in the logistics arena. We looked at metrics from the following organizations: SCC (The Supply Chain Council) APQC (American Productivity and Quality Center) WERC (Warehousing Education and Research Council) MESA (Manufacturing Enterprise Systems Association) OFC and SCE (Order Fulfillment Council and Supply Chain Execution Systems & Technologies Group of MHIA) The team created a master list of metrics focused on warehouse and plant operations across all organizations. Where an organization had the same or similar metrics we reviewed the definitions and calculations for each organization. Our findings? It most cases the definitions were similar but different. Our findings support what practitioners have known for years it s hard to compare operations when you are not speaking the same language. The joint team then either chose a metric to support or developed a consensus decision that locked in on the defi- 7

Figure 3 is an example of our findings looking at one common metric on-time delivery. Our review found that this very important metric is being recommended and supported across all of the groups. We then found that each organization has similar but different definitions and calculations and locked in a common definition and calculation. Figure 3: The Joint Metrics team reviewed dozens of metrics and their use across multiple organizations, and developed the metrics used in this paper through an analysis and review, resulting in consensus across WERC, MHIA s OFC and SCE, and MESA. The Future While most organizations have started to realize that metrics matter best practice organizations have started to realize they must learn to drive performance across their network of execution facilities in a way that will please customers and shareholders. This harmonization of goals can help to drive synchronization of activities. It s time for companies to enter the next stage. Companies must now measure performance across execution or order fulfillment processes. To do that, the industry needs coherent and consistent measures that keep both production and warehousing facilities working in harmony to improve the responsiveness and competitiveness of each company. 8

Framework for the Fix Performance metrics for production plants and warehouses have some distinct areas, but many areas in common. From an overall business perspective, the execution from incoming materials through production and out through distribution is a connected business process. Companies must move from measuring performance at each department or facility differently to a coherent set of metrics that help the company and its supply chain perform well. MESA, OFC, SCE and WERC have identified six major performance areas that cross all of these facilities. Figure shows these as facets of operations performance. Some are more customer-facing and others determine internal performance that impacts costs and revenue-generating ability. Companies need to deploy consistent measures in the following execution performance categorie4s: Customer-facing: Order fulfillment, mass customization & flexibility Internal: Inventory management, execution productivity Customers and internal impact: Quality and compliance, business & financial Figure 4: Every facet of operations performance must be consistent and aligned between plants and warehouses for maximum success. Each category is discussed as section of this report. In every category, there are many joint metrics; these are provided in an appendix. These metrics will be also included in the execution benchmarking survey that MESA, MHIA and WERC will jointly execute annually in the first half of the year starting in 2009. 9

Order Fulfillment Customers experiences and perceptions are what drive a company s success. From the execution perspective, this all comes down to whether the customer received their order exactly when, where, and how they expected it. Order fulfillment involves many aspects of a company, from sales and marketing to order entry, transportation and finance. However, the core of the process involves the activities that take place in production and warehousing facilities: receiving and staging materials, planning and scheduling the order, producing the order, picking, packing and moving products into distribution, and releasing the shipment. Companies simply cannot expect to delight customers unless those processes are efficient and coordinated. At present, many companies lack consistent metrics that help all facilities work together toward this essential aspect of customer satisfaction. Consistent sounding metrics may still not be defined and calculated uniformly from one site to another. Figure 5 shows one example from the 2007 WERCwatch benchmarking study of 975 responses. Figure 5: On-time delivery is measured in a variety of ways by the respondents to the 2007 WERCwatch benchmarking study. Figure 6 shows two key metrics for this area and the definitions agreed on by a team from MESA, MHIA and WERC. The perfect order index is another metric in this category. Metric Definition Calculation On-time Delivery Order Fill Rate The percentage of orders that arrive at their final destination at the agreed upon time. Note that there are many definitions of "On-Time", and that the "time" may be a specific hour or day, or a window of time. "Agreed Upon" means that the customer and shipper have agreed to the delivery time as a general commitment or as a part of the purchase order or contract. Measures percent of orders filled according to customer request. Note that a single customer order can request multiple shipments. In this case each shipment would be tracked as a separate request. Number of orders delivered on time / total number of orders Number of orders filled to customer request / total number of orders filled Figure 6. Example order fulfillment metrics, with definition and calculation. Customers' chief concern with suppliers is often their ability to fill orders on time. 10

Mass Customization & Flexibility Responding to the market and capturing sub-verticals or specific demographic groups interest and loyalty requires extreme flexibility and often totally new processes and mindsets in production and warehouse facilities. While the original Ford model of mass production was excellent, few companies can operate on that premise today. Customers want products that are customized to their needs, and will find companies to supply those, sometimes at a premium price. Most plants and warehouses were originally designed for make-to-stock or maketo-forecast environments. These facilities are now facing the choice: gain flexibility or shut down. One of the major challenges many facilities face is that their performance metrics still provide an incentive to operate in a mass production mode. Figure 7 shows some of the metrics that companies are putting into place to ensure they can be responsive and deliver high value to the market. These must have a heavy weighting in companies whose strategies rely on product differentiation and rapid response to market shifts. Metric Definition Calculation Number of unique SKUs processed per day Percent of Revenue from Products less than 2 Years old How much variety the plant and warehouse manage daily Portion of company revenue from products introduced within past 24 months or 8 quarters Number of Unique SKUs each day per execution stream / Number of Days in period Revenue from Products Introduced in Past 2 years / Total Revenue Figure 7: Example mass customization and flexibility metrics, with definition and calculation. To meet corporate innovation and globalization strategies, plants and warehouses must be able to handle a proliferation of products and materials as well as short product lifecycles. Some facilities designed for make-to-stock are not facing the choice: gain flexibility or shut down. 11

Inventory Management Inventory is both the essential lifeblood and the number one cost for most companies. Since perfect demand forecasting is impossible, companies must hold inventory at least at the de-coupling point between the forecast-driven push activities and the demand-driven pull activities. Inventory management is basic to business, but complex and multi-faceted. Inventory includes raw materials, work-in-process (WIP) and finished goods (direct materials for what is sold) as well as all of the indirect materials that are essential to running both production and the rest of the enterprise, from paper clips to complex tools and fixtures. Then consider the multiple warehousing and production sites, as well as the industry network of partners, and the complexity climbs tremendously. Figure 8 calls out some of the metrics in this category. Metric Definition Calculation Days on Hand - Finished Goods Inventory Backorders as a Percentage of Total Orders Average sales days of finished goods inventory on hand in plants and warehouses The portion of total orders that are held and shipped late due to lack of availability of stock. Can be measured by lines or by PO, by units or by $ value. Average FG Inventory Value ($) / Average Daily Sales $ per month Number or $ of orders (or lines or units) held and not shipped / total number or $ of orders (lines or units) Figure 8: Inventory management metrics, with definition and calculation. Inventory is the largest element of cost for many companies and must be carefully managed. Striving to keep inventory low while keeping order fulfillment performance high only makes sense. Yet this is an area where production facilities and the warehouses that feed them materials and distribute the products they make may come into conflict based on a metrics mismatch. For example, high inventory buffers may be required in a distributed make-to-order environment; trying to reduce them may put the supply network and customer delivery at risk when demand is high. 12

Execution Productivity The constant drive in production and distribution facilities has always been productivity. Costs in business always rely not only on the effective use of inventory, but also of resources including people, equipment, tools and facilities. Historically, these productivity metrics have been the basis on which the plant or warehouse manager is evaluated. In a climate of continuous improvement, productivity numbers are often expected to rise from year to year. However, as we pointed out in the section, Pressure on Performance, many core business strategies might make it difficult to even maintain the same rate of productivity. Targets for productivity should be different in a high-mix or make-to-order environment than a lower mix or ship-from-stock facility. With more materials, products, facilities and partners participating in today s business, facilities must ensure their efforts are recognized even if productivity suffers as a result. Some of the traditional metrics as shown at the top of Figure 9 consider the labor costs per unit produced or shipped. These tend to drop in high-mix situations with the need for changeovers in the plant and varied picking patterns in the warehouse. A metric such as revenue or value-add (per square foot or per employee) might better reflect premium value achieved through having many more products that each serve a specific market segment or region. Metric Definition Calculation Labor Cost / Unit or Order Revenue per Square Foot Average labor cost per unit or order produced, picked and packed Revenue generated in plant and warehouse space Number of Units or Orders Produced Picked or Packed / Total Plant or Warehouse Labor Cost Number of square feet in plant & warehouse/ Total company revenue Figure 9: Example execution productivity metrics, with definition and calculation. Companies that cannot execute orders efficiently will be unable to compete with lower-cost providers; these have been the traditional core metrics for most warehouses and plants. Productivity numbers are often expected to rise from year to year; however core business strategies might make it difficult to even maintain the same rate of productivity. 13

Quality & Compliance The bar for quality and compliance is high in developed countries; industry networks that reach into less established economies can make that hurdle seem even higher. Clearly, products that do not meet expectation offset the customer satisfaction available from order fulfillment excellence. Products can be made off-specification or damaged in material handling operations in the plant or warehouse. Regulatory compliance is perhaps even more daunting. Globalization has not yet been accompanied by a harmonization of regulations and standards. Every country or region has its own laws, and companies must comply with all of these. Whether receiving materials from, operating in, or shipping to a region, the company may be held responsible for meeting all regulations. Safety and environmental regulations are now in place somewhere in the world for nearly every industry. So compliance is increasingly complex for most industrial companies. Whether the issue is quality or regulatory compliance, there is a cost associated with poor performance that the company cannot recover. Figure 10 shows some typical metrics. In some instances, the plant and warehouse can work together to solve problems relating to safety and product damage. They must also ensure that their practices are not hurting the ability of the other facilities to put out quality products and meet every regulation at every site. Metric Definition Calculation Warranty or Recall Costs Safety ( OSHA-reportable) incidents per year Annual Costs of Fulfilling Warranties or Handling Recalls Number of safety incidents reported to the governmental health & safety authority Cost of labor (returns, repair, shipping) per return *(times) number of returns per year Number of reported safety incidents per year Figure 10: Example quality and compliance metrics, with definition and calculation. Quality is expected and compliance mandatory; so companies must create processes to achieve these at a low cost. Plants and warehouses must ensure their practices are not hurting the ability of the other facilities to put out quality products and meet every regulation at every site. 14

Business & Financial The performance of the business rests on its facilities ability to execute effectively as described above. Usually, financial metrics cannot be linked cleanly to specific metrics in the facilities. Yet, there are some financial metrics on which the production and warehousing operations have significant impact, and these are the ones we include here. A major portion of fixed assets are tied up in plant and warehouse facilities, so all the financial metrics looking at asset performance are in the spotlight (Figure 11). Other issues include speed or cash-to-cash cycle time. These facilities are also where the major inventory costs are incurred as well as where revenue-generation capabilities lie. So profit and margin type metrics are also relevant. As industry networks take hold, companies that maintain their production and warehousing facilities have made a clear statement to the world that they believe they have core competency in these areas. While plants and warehouses cannot control financial outcomes, they can clearly impact it positively or negatively. Metric Definition Calculation Cash-to-cash cycle time Return on (Net) Assets Avg. time from payment to suppliers to payment by customers Net Operating Profit / Net Assets (cash + working capital + fixed assets) Inventory Days +(plus) Days Sales outstanding (Receivables) - (minus) Days payables outstanding Net Operating Profit / Net Assets (cash + working capital + fixed assets) Figure 11: Example business and financial metrics, with definition and calculation. Companies must operate efficiently in facilities to achieve sound performance on these core objectives. 15

Toward Holistic Execution Clearly, metrics matter. People behave in ways that enable them to meet the goals of their organization as specified by the metrics used to judge their actions. Sometimes these metrics are aligned and help the company achieve its goals, while other times alignment leads to higher costs, inefficiencies and frustration. It is critical then to start with the strategy of the company and understand what metrics will be employed to achieve that mission. Clearly, optimizing one part of the company may sub-optimize the overall performance of the company and supply chain. As companies strive to operate effectively across their complex networks of owned and partner facilities, measuring performance in a consistent and holistic fashion across this landscape is becoming more and more critical. Fortunately, there are metrics that plants and warehouses commonly use today that can be harmonized in every category. Some metrics actually rely on good performance of both plants and warehouses to hit the target, such as the perfect order index. MESA, OFC and SCE and WERC have helped to lay the foundation and framework by creating common definitions and calculations for an entire set of metrics that encompass both plants and warehouses. This work will also continue to identify areas in which there are likely to be conflicts, so that team members and executives may prioritize and weight their views appropriately. Some metrics actually rely on good performance of both plants and warehouses to hit the target, such as the perfect order index. This is the first deliverable from the joint efforts of the MESA, OFC, SCE, and WERC. The goal is for members of all of these organizations to examine current practices in their companies and industry networks and move toward a more holistic view. Every facility is part of one or more industry networks. The performance that customers and stakeholders see is a direct result of what happens in those warehouses and plants. Successful companies are beginning to work more effectively across departmental and facility lines, as well as with suppliers and trading partners. They perform better on specific metrics such as the perfect order, and they adopt standardized metrics across facilities to drive overall company and supply chain performance. This holistic approach will leave others at a competitive disadvantage. 16

Appendix: Harmonized Joint Metrics Metric Name Definition Calculation Order Fulfillment Performance On-time Delivery On Time Shipments On-Time Ready to Ship Order Fill Rate Fill Rate Line Order Cycle Time - Internal Order Cycle Time - Total Perfect Order Index The percentage of orders that arrive at their final destination at the agreed upon time NOTE: there are many definitions of "On-Time", and that the "time" may be a specific hour or day, or a window of time. "Agreed Upon" means that the customer and shipper have agreed to the delivery time as a general commitment or as a part of the purchase order or contract The percentage of orders shipped at the planned time (Shipped means off the dock, and in transit to its final destination) NOTE: the time to ship may be defined by the customer, or it may be determined by the shipper in order to accommodate an On-time Delivery The percentage of orders ready for shipment at the planned time NOTE: "ready for shipment" typically means that packaging and shipping documents are completed and ready for pickup Measures percent of orders filled according to customer request NOTE: a single customer order can request multiple shipments. In this case each shipment would be tracked as a separate request. Measures percent of orders lines filled according to customer request NOTE: a single customer order line can request multiple shipments. In this case each shipment would be tracked as a separate request. The average internal time between when the order was received from the customer and order shipment by the supplier NOTE: order shipment is defined as off of the dock, onto the shipping conveyance and ready for transit and pickup is scheduled. The average end to end time between order placement by the customer and order receipt by the customer A compilation score which measures the result of each of the 4 major components of a Perfect Order: * Delivered On-Time * Shipped Complete * Shipped Damage Free * Correct Documentation (includes all documents, including accurate invoice) These are the next 4 items in this table of metrics Number of orders delivered on time / total number of orders Number of order shipped on time / total number of orders shipped Number of orders ready for shipment on time / number of total orders shipped Number of orders filled to customer request / total number of orders filled Percentage of orders lines filled to customer request / total number of order lines filled Number of orders shipped / (Time order ready for shipment time order received from the customer) Number of orders shipped / (Time order received by customer time order placed) The perfect order index (POI) is established by multiplying each component of the perfect order to one another. For example, if a company is experiencing a measure of 95% across all 4 metrics of the perfect order (on time, complete, damage free and accurate documentation), the resulting perfect order index would be 81.4% On-time Delivery (See Definition Above) (See definition above) Shipped Complete Per Customer Order Shipped Damage Free (outbound) Correct Documentation (ASN, Invoice, etc.) Measures the percentage of orders which shipped completely, meaning that all line/units ship with the order per agreement between the customer and shipper. This measures the percentage of customer orders shipped in good and usable condition. NOTE: orders damaged in transit are not considered here. The percent of total orders for which the customers received an accurate invoice and other required documents including ASNs, etc. Number of orders shipped with all lines & units / total number of orders shipped Number of orders shipped damage free / number total orders shipped. Number of orders with correct documentation / number of total orders

Inventory Management Performance Order Picking Accuracy Inventory Accuracy Days on Hand - Finished Goods Inventory Days on Hand - Raw Material Days on Hand - Work in Process (WIP) Average Value of Backorders as a Percentage of Sales Backorders as a Percentage of Total Orders Lost Sales (Percentage SKUs Stocked Out) On Time Receipts - Supplier Execution Productivity Cost per Order - Production Cost per Order - Warehousing Labor Cost / Unit or Order Revenue per Employee Value-add per Employee Revenue per Square Foot Average hours overtime per week. Distribution Cost Per Unit Shipped Administrative Cost as a Percentage of Total Cost Annual Workforce Turnover Employee Productivity vs. Standard Productive Hours to Total Hours Measures the accuracy of the order picking process where errors may be caught prior to shipment such as during packaging. Measures the accuracy (by location and units) of the physical inventory compared to logical (Book or System) inventory: If the warehouse system indicates that 10 units of part number xyz are in location 29, inventory count accuracy indicates how frequently one can go to such a location and find that the physical count matches the system count. Average sales days of finished goods inventory on hand in plants and warehouses The number of productive days before raw material supply is consumed The number of productive days required to consume Work-in-process (WIP) inventory Measures the value of sales orders that are held up in back orders as a percent of total sales orders This is a key risk indicator The portion of total orders that are held and shipped late due to lack of availability of stock. Can be measured by lines or by PO, by units or by $ value An important risk indicator: what percent of sales were lost due to stock outs Percent of orders received from a supplier on the date requested. Total plant costs including: Fixed: space, utilities, depreciation Variable: labor/supplies Total warehouse costs including: Fixed: space, utilities, depreciation Variable: labor/supplies Avg. labor cost per unit or order produced, picked and packed Average revenue generated for each employee How effective is the employee base at generating value Revenue generated in plant and warehouse space Average number of overtime hours paid to non-exempt employees weekly NOTE: this should include statutory overtime hours, not hours which exceed a production standard. The cost to run distribution relative to the units shipped through distribution. Distribution costs include: management activities; track inventory deployment; receive, inspect, and store inbound deliveries; track product availability; pick, pack, and ship product for delivery; track inventory accuracy; track third-party logistics storage; and shipping performance. The portion of total warehouse administration expense required to support warehouse operations. The rate at which permanent employees are replaced (excludes casual or seasonal labor). Measures employee productivity against a standard developed by the company for that activity. NOTE: Standard is developed by each company based on their work profile Measures employee productivity against total hours (includes all hours including indirect and direct) Orders picked correctly / total orders picked Absolute value of the sum of the variance between physical inventory and perpetual inventory (by location and by units) Average FG Inventory Value ($) / Average Daily Sales $ per month Gross raw material inventory value / average daily value of RM usage WIP inventory days of supply are calculated as WIP inventory value / average daily value of WIP consumed Average value of backorder (over some defined period of time) / average value of sales (during the same period) Number or $ of orders (or lines or units) held and not shipped / total number or $ of orders (lines or units) $ sales that were lost (i.e., they did not become backorders) / total sales Number of orders received on time / total number of orders Total Plant Costs / Total Orders Total Warehouse Cost / Total Revenue # Units or Orders Produced Picked or Packed / Total Plant or Warehouse Labor Cost Total Employee Payroll / Total Company Revenue Total revenue - material purchase / total employees (FTEs) # sq. ft. in plant & warehouse / Total company revenue Total overtime hours paid to plant & warehouse employees / # hrs worked in plant & warehouse Total cost of operating distribution / total units shipped Administrative cost/total cost Number of NEW employees at the beginning of the period/total number of employees at the beginning of the previous period Total time worked/standard work time Hours billed to a specific activity or project/ total hours worked

Quality & Compliance Performance Customer Reject Rate Warranty or Recall Costs OSHA-Reportable incidents/yr. Avg. number of units or orders rejected by the customer Annual Costs of Fulfilling Warranties or Handling Recalls Number of safety incidents reported to the governmental health & safety authority Orders/Units Rejected / Total Orders/ Units Shipped Cost of labor (returns, repair, shipping) per return *(times) # of returns / yr # of reported safety incidents / year Inventory Shrinkage as a Percent of Total Inventory The amount of breakage, pilferage, and deterioration of all inventories relative to total inventory. Usually stated in terms of value; not units. Sum (value of breakage, pilferage, deterioration to all inventory) / total value of all inventory Mass Customization / Flexibility Performance Number of unique SKUs processed per day % of Revenue from Products <2 Years Old Rate of New Product Introduction Average Product Lifecycle How much variety the plant and warehouse manage daily Portion of company revenue from products introduced within past 24 months or 8 quarters Avg. # of new products introduced each of the past X years Time a particular SKU or model is sold actively into the market % Increase in New Products Acceleration in volume of new products through facilities Business and Financial Performance Cash-to-Cash Cycle Time Average Days Sales Outstanding Net Operating Profit (after Taxes) Return on (Net) Assets Avg. time from payment to suppliers to payment by customers including time in stock. Example: item was received and sat in stock for 30 days, supplier was paid 20 days after receipt, customer paid 15 days after shipment. The amount of time required to convert receivables to cash. To even out seasonality, this includes a rolling 5 month average of AR (This is also known as Average Collection Period ) Net earnings after taxes Profitability based on assets used to generate the profit Number of Unique SKUs each day per execution stream / Number of Days in period Revenue from Products Introduced in Past 2 Yrs. / Total Revenue Total # new products over period selected / X# of years in period Elapsed time from new product introduction to retirement per SKU / # of SKUs New products 1, 3, 5 yrs ago / New products this year Inventory Days +(plus) Days Sales outstanding (Receivables) - (minus) Days payables outstanding In the example, 30+15-20=25 Average 5 month AR / (total annual sales/365) Net Sales -(minus) operating expenses / Operating Profit (minus) taxes Net Operating Profit / Net Assets (cash + working capital + fixed assets) Net Margin Percentage Net Margin is: Net Income (usually net of tax and interest) and represents a company's profitability Net margin $ / revenue $ Potentially Conflicting Metrics Between Plant and Warehouse Asset Utilization vs. Inventory Days Overtime vs. On-time delivery or perfect orders Order cycle time vs. inventory on-hand Postponement or warehouse costs Potentially Conflicting Metrics Between Execution and Enterprise % Revenue from new products vs. execution costs Lower Procured Parts Cost vs. Order Cycle time Lower assets (viz. outsourcing) vs. Inventory, order Lead time 19

About the Authors Julie Fraser Fraser, Principal Industry Analyst for Cambashi, has over 20 year s experience as a manufacturing systems industry advisor, marketer, speaker and consultant. She leads US operations for Cambashi, providing independent research and analysis on the business reasons for industry to use IT. Prior to joining Cambashi, she ran Industry Directions, an analyst firm focused on enterprise, supply chain and plant floor applications. Previously, she was VP Marketing for Baan Supply Chain Solutions, Senior Analyst on Manufacturing Execution Systems (MES) and Integration at AMR, and editor-in-chief of the CIM Strategies newsletter. She is an active member of MESA International and a member of APICS and Phi Beta Kappa. For more information, visit www.cambashi.com. Kate Vitasek Vitasek, Managing Partner at Supply Chain Visions and on the faculty of Tennessee and Wright State University, is a thought leader in the area of Supply Chain Management and is a well-recognized authority on performance management and metrics implementation. She has been recognized for her leadership in the profession as a Woman on the Move in Trade and Transportation by the Journal of Commerce and was also recognized a as a Rainmaker in by DC Velocity Magazine. Kate has authored over 50 articles and is a popular speaker at industry events including being a joint author on WERC s annual warehouse benchmarking study. Kate is the founder and Managing Partner of Supply Chain Visions, a small consulting practice that specializes in supply chain strategy and education. For more information, visit www.scvisions.com. Karl B. Manrodt, Ph.D. Dr. Manrodt is an Associate Professor in the Department of Management, Marketing & Logistics at Georgia Southern University. His research interests revolve around the role of information in logistics systems, performance measurement, the role of logistics in health care, and customer value determination in a logistics setting. His publications have appeared in such journals as the Supply Chain Management Review, Transportation Journal, the International Journal of Physical Distribution and Materials Management, Interfaces, and the Journal of Business Logistics. His research on top shippers has appeared in Logistics Management for the last seventeen years. Georgia Southern University is a growing nationally recognized logistics program located in Statesboro, Georgia. The University is a major teaching and research institution. The faculty publishes in a wide range of topics and are invited to speak at events across the globe. The Southern Center for Intermodal Transportation offers a wide range of research services and resides in the College of Business. For further information, please visit www.georgiasouthern.edu or www.manrodt.com. Reviewers Paul Ashmore, MESA Technical Committee Charlie Gifford, MESA Technical Committee & 21st Century Manufacturing Solutions Ed Romaine, OFC Chairman, Remstar Mike Ogle, OFC Managing Director Jim LeTart, SCE Group Chairman, RedPrairie Ken Miesemer, St. Onge Company & WERC Board of Directors 20

About the Sponsors MESA is an association of manufacturers/producers, solution providers and industry professionals, promoting innovation and best practices sharing, with a goal of delivering valuable knowledge around operations-centric enterprise solutions. MESA defines industry standard methodologies and approaches that allow manufacturers/ producers to bridge execution excellence with enterprise level requirements. MESA's industry events, symposiums and publications help cultivate understanding, analysis and the exchange of strategies and innovation to achieve manufacturing leadership. For more information, visit www.mesa.org. The Order Fulfillment Council (OFC) develops and delivers educational and training resources for end users, educational institutions, allied organizations, and its own members to properly understand and apply order fulfillment solutions. OFC serves as a conduit to share ideas and information amongst member companies regarding opportunities in the marketplace by developing formats/forums to engage OFC members throughout the year. Click on www.mhia.org/ofc for more information. The Supply Chain Execution Systems & Technologies Group members are the Industry s leading suppliers of Supply Chain Execution software, hardware and services. They supply solutions worldwide and in virtually every major manufacturing and distribution sector. Go to www.mhia.org/sce for more information. The Warehousing Education and Research Council is the only professional organization focused on warehouse management and its role in the supply chain. WERC is where distribution experts come together to share practical knowledge and professional expertise with the aim of improving individual and industry performance. Through membership in WERC, seasoned practitioners as well as those new to the industry stay at the forefront of innovation, master best practices and establish valuable professional relationships. WERC focuses on practical operations within the context of strategic global matters like technology, globalization, infrastructure, workforce management and legislation. WERC offers unique resources that help distribution professionals stay at the leading edge including educational events, practical research, expert insights and peer-to-peer knowledge exchange. For more information, go to www.werc.org. 21