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Please see attachments. Due Tuesday, 7/17

Measuring Performance

Read “Executive Insight” in Michael Hugos: Essentials of Supply Chain Management. Answer the following questions:

•  Comment on the indicators that this executive has chosen to monitor. Do they provide information about the entire supply chain’s performance?

•  What metrics would you consider to improve the identification of supply chain performance? Why?

2-3 pages. APA citations.

Executive Insight

Supply chains created in the last several decades often focused on producing and delivering products at the lowest price. That worked best when product life cycles were longer and sales forecasts were more accurate. But now, due to the rate of technical and economic change in our global economy, product life cycles are measured in months, prices of component parts, fuel, and labor fluctuate constantly, and sales forecasting is much harder. Supply chains need to focus on responding to constant change. Shoshanah Cohen, Director Emeritus of PRTM Management Consulting, explains why supply chains must balance needs for efficiency and low cost with needs for responsiveness and high customer service.

Traditional supply chain metrics focus on efficiency and productivity, whereas financial metrics focus on cost, revenue, and profitability. While it’s not uncommon to find supply chain performance management programs that use both operational and financial metrics, many companies don’t do this particularly well.

As an example, a leading manufacturer of personal computer peripherals relied on a business strategy based on ongoing innovation and frequent new product introductions. Product managers were measured on their ability to design, develop, and release a constant stream of profitable new products, while growing market share for their particular categories. A make-to-stock supply chain supported this strategy so that customers could order and receive products immediately after they were released. Supply chain metrics tracked on a regular basis included material and product costs, delivery performance, fill rate, and transportation costs.

Because the company expected every product to maximize its potential margin, the supply chain was optimized to manufacture at the lowest possible unit cost. That meant developing low-cost material suppliers and setting up production in low-cost countries, including several relationships with large original design manufacturers (ODMs) in Asia and a large company-owned plant in China. Standard product costs were established based on anticipated material prices, planned production schedules, and ocean shipment for virtually all products. Standard product margins, therefore, reflected best-case scenarios for procurement, production, and distribution, and variances were due to fluctuations in selling price.

Although most manufacturing sites were in Asia, most of the company’s business was in North America and Europe. Standard ocean shipment meant that products took up to five weeks to reach regional distribution centers, making the strategic objective of fast order fulfillment a major challenge. “We’re very dependent on an accurate forecast,” explains the company’s Vice President of Global Supply Chain, “but the peripherals market is pretty volatile. Plus we have constant product introductions and phase-outs and a lot of slips in the product development schedule, even though product release dates rarely shift to accommodate them.”

Expediting was one of the few levers available to increase flexibility amid the combination of complexity and forecast inaccuracy—and was used frequently. Shipping raw materials and finished goods by air rather than sea nearly tripled transportation costs, but was necessary to maintain targeted customer-service levels. When necessary, the company also reworked products at regional distribution centers to align availability with current demand. “We recognize that this is also a very expensive option,” notes the Supply Chain VP, “especially since our whole cost model is based on producing in locations with low labor rates. But this is the only way we can meet our fill-rate and on-time delivery objectives.”

The resulting costs were charged to the supply chain group, appearing in quarterly financial reports as unplanned/incremental expenses. While this had a significant impact on the perceived performance of the supply chain organization, product management didn’t see these added costs as an issue. Because they were not added to the product standard cost, they were virtually invisible to product managers.

Of course, the total cost of managing the supply chain increased significantly as the organization struggled to provide the required flexibility. “We got pummeled every time the quarterly financial reports came out,” the Supply Chain VP explains, “it looked like our spending was out of control. We needed to find a way to get the rest of the company to understand that it wasn’t just a supply chain issue, even though the way we were measuring performance made it look that way. We needed a better balance of financial and operation metrics.”

To address this problem, the company modified its enterprise resource planning (ERP) cost module so that expedite and rework costs could be allocated to each major product group and their impact analyzed. “We would have liked to have been able to do this on a product-by-product basis,” notes a financial analyst, “but the cost of putting that level of granularity in place was prohibitive.” But even at a product-group level, the impact was clear: for many products, the costs of accommodating development delays and forecast inaccuracy through air shipment and local reconfiguration was enough to wipe out profitability for some products.

Product managers were not happy with the new means of measurement. “We hadn’t changed anything we were doing,” explains one Product Manager, “but suddenly it looked like our margins were degrading.” The executive management team stood firm despite numerous complaints from the product groups, and directed them to focus more attention on forecasting and compliance with established product-development schedules. The new metrics became the catalyst needed to move forward with several major initiatives: improving the forecasting process, increasing product modularity and configurability, and updating systems and processes to enable increased parts commonality.

Of course changing the way costs are allocated does nothing in and of itself to reduce costs or optimize a supply chain. But simply increasing visibility can drive changes in behavior that can lower the overall cost of managing a supply chain.

This example is not unusual. As this company found, measuring operational metrics in isolation can be a counterproductive way to use performance-related data. A more effective approach is to start with the company’s strategic goals, identify the supply chain configuration necessary to support the strategy, and then derive operational and financial performance metrics that support those goals.

Shoshanah Cohen is Director of the Stanford Global Supply Chain Management Forum, a research institute in partnership with industry and the Graduate School of Business at Stanford University. The Forum’s mission is to advance the theory and practice of excellence in global supply chain management through, research, development, and dissemination of best practices within a dynamic and increasingly global business environment. She is also co-author of Strategic Supply Chain Management: The Five Disciplines for Top Performance (McGraw-Hill, 2005).

Reference

Hugos, Michael H. (2011-07-11). Essentials of Supply Chain Management, 3rd Edition [3] (VitalSource Bookshelf), Retrieved from http://digitalbookshelf.argosy.edu/books/9781118279229/5/10