Harnessing the Power of Supply Chain Metrics Alan L

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Harnessing the Power of Supply Chain Metrics

• Alan L. Milliken CFPIM CIRM CSCP
• BASF Corporation
• Presented to West Coast Florida Chapter of APICS
• February 12, 2008

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Alan L. Milliken CFPIM CIRM CSCP

• 20 years at major manufacturing sites working
  in Production, Logistics, Process Quality
  Control, Industrial Engineering, Training, and
  Scheduling
• 12 years as a Supply Chain Consultant and
  APICS Instructor including two years in Mexico
  City helping BASF Mexicana improve their supply
  chain. While there, taught Operations Management
  as guest professor at University of Panamericana
  in Mexico City.
• Identified by an independent consulting firm
  as one of three APICS members who best answer the
  question, What is a Supply Chain Manager?
• Served as an SME (Subject Matter Expert) on
  the team that developed the new Certified Supply
  Chain Professional (CSCP) program.
• Served as an SME on the team that developed the
  new Certified Forecasting Professional (CFP) for
  the Institute of Business Forecasting (IBF)
• Engineering Degree from Auburn University and
  MBA from Clemson University

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The worlds leading chemical company with
revenues of approximately 70,000,000,000 USD in
2007.
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BASF 5-Year Stock Performance
(PPS in USD)
At BASF, We dont make a lot of the products you
buy, we make a lot of the products
you buy better.
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Aligning Supply Chain Metrics with Corporate
Strategies and Competitive Priorities
If you dont know where you are going, everyway
is the wrong way.
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Value-Based Management Approach
The companys definition of success will define
the contents of the performance management system.
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BASFs Value-based Management
Shareholders provide capital
Shareholders receive high ROI
1. Invest in making our Customers better
3. Create Value for our Shareholders
BASF
2. Deliver Value to our Customers
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Value-Based Management Concept

• Value can be created by
• increasing Profit and/or
• reducing capital employed(e.g., inventories,
  receivables)

Profit
Reducingcapitalemployed
Source Kurt Bock Chief Financial Officer
BASF Group
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Who in the Organization Can Create Value?

• All employees can create value by optimizing the
  value drivers in their day-to-day business, e.g.,
  by
• increasing sales through higher prices and/or
  sales volumes
• reducing costs
• optimizing inventories and receivables
• using production plants optimally

Source Kurt Bock Chief Financial Officer
BASF Group
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Value Creation Driver Tree
The firm must link Supply Chain Value Drivers to
Financial Performance
Value Drivers

• Pricing
• Product mix
• Delivery Performance

• Innovation (product and business models)

Sales revenue

Profit

• Shipping costs
• Packaging costs
• Transport costs

• Variable manufacturing costs
• Raw materials costs

-
Variablecosts

• Fixed manufacturing costs
• Process innovation

EVA after costs of capital
Fixedcosts
-

• Inventories
• Receivables
• Forecast reliability

• Payment terms/dunning

Working capital
Costs of capital
X

• New investments
• Investments in expansions
• De-bottlenecking

Fixedassets
Source Kurt Bock Chief Financial Officer
BASF Group
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Example Supply Chain/Marketing SalesCase
study from a BASF business unit

• Sustainable reduction in current assets by
  120m ( ca. 25)
• Streamlining of product range
• Forecast reliability
• Batch size optimization
• Simplification of global warehouse structures
• Shorter payment terms
• Improved Inventory Control

Sales revenue
Profit
Variablecosts
EVA after costs of capital
Fixedcosts
Working capital
Costs of capital
Fixedassets
Source Kurt Bock Chief Financial Officer
BASF Group
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Where does Supply Chain Capability Fit in the
Planning Execution Model?
Identification of Customers, Products,
Competition, Socioeconomic Environment
Market External Environment Analyses
Overall missions goals of the Organization,
Recognition of Distinctive Competencies.
Corporate Strategy
Link Corporate and Supply Chain Strategies
The strategy of the corporation and associated
supply chain needs drive the Performance
Management process.
Future Direction (Global Strategy, New Products
Services, etc)
Competitive Priorities(Cost, Quality, Time,
Price, etc..)
Functional Area Strategies Finance Marketing
Supply Chain others
Key Performance Indicators
Source Operations Management, Fifth Edition,
Krajewski Ritzman
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The Roles of Supply Chain Metrics
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The Power of Measurements
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Performance Measurement
Techniques for measuring performance are called
metrics. The objective of Performance
Measurement is to help the firm develop and
maintain a competitive advantage based on adding
value to products and enhancing customer
satisfaction.

• Performance describes what a product or service
  does or doesnt do to meet or exceed the
  customers needs.

• Measurement implies some kind of qualitative or
  quantitative method for determining if the
  performance is progressing toward the goal.

Metrics can be categorized as Cost-Based,
Quality-Based, or Time-Based. A key to meeting
objectives is a comprehensive and balanced set of
metrics. For example, Prime Quality
(Quality), Inventory Investment (Cost), and
Delivery Speed (Time)
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The Closed-Loop Measurement System
PLAN
DO
RE-DO
CHECK
If the results are different than planned, the
Strategy, Action, or Measure must be revised.
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Role of Performance Metrics

• provide a quantified definition of what is
  important and how the organization is performing.
  
• ensure alignment between strategical, tactical,
  and operational goals objectives.
• facilitate a cross-functional view of relative
  importance among individual, team, and functional
  goals objectives.
• motivate the organization towards continuous
  improvement.
• provide a means to link individual and
  organization performance to reward systems.

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Balanced Scorecard Approach
Performance Measurement must take into
consideration four perspectives
Financial Perspective
How do we look to shareholders?
At what must we excel?

• Contribution Margin
• Cash Flow
• Operating Result
• Return on Assets
• Days Sales Outstanding
• Value-Added Productivity

Internal Perspective
Customer Perspective

• Forecast vs. Actual Sales
• Actual vs. Plan Production
• Inventory Velocity
• Non-Optimal Shipments
• Distribution Expenses
• Flexibility response time

• Promise vs. Request Date
• Promise vs. Delivery Date
• Request vs. Order Date
• Order vs. Delivery Date
• Actual vs. Plan Ship Date
• Ship vs. Order Quantity

Innovative Perspective
How do we look to our customers?

• Trends in performance
• Rates of improvement
• Learn new processes
• Learn new technologies
• Share knowledge

Can we continue to innovate and improve?
Source The Balanced Scorecard by Norton
Kaplan
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SCOR Model Relates Metrics to Cross-Functional
Processes
Strategy Make-to-Stock Competitive Priority
Delivery Reliability

• FCST Accuracy
• FGs Inventory

PLAN
SOURCE
DELIVER
MAKE
Purchasing
Manufacturing
Logistics

• Supplier OTD
• Supplier Fill Rate

• Prod. Plan Adherence
• Quality-Yield Performance

• On-Time Delivery
• Fill Rates

Source Supply Chain Council
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Alignment of Metrics
In addition to balancing metrics across multiple
perspectives, the organization must align goals
objectives vertically.
Note Visit www.supply-chain.org for more
information on the SCOR Model and aligning
metrics.
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Aligning Supply Chain Metrics with Corporate
Operations Strategies
Operations Strategy (A)Make-to-Order or (B)
Make-to-Stock or Customized Service
Standard Service Competitive Priorities ___Deliv
ery Speed ___Customization ___Low Cost
___On-Time Delivery ___Flexibility
___Consistent Quality Profit Margins ___Higher
___Lower Supply Chain Design ___Efficient
___ Responsive SC Design Features ___Flex
or Intermediate Flows ___Line Flows ___High
Capacity Cushion ___ Low Capacity Cushion
___High Inventory ___Low Inventory ___Minimize
Lead Time ___Minimize Cost Key SC
Metrics ___Order Fulfillment Time ___SCM
Costs ___Upside SC Flexibility ___On-Time
Delivery ___New Product Lead Time
___Inventory Investment
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Aligning Supply Chain Metrics with Corporate
Operations Strategies
Operations Strategy (A)Make-to-Order (B)Make-to-
Stock Customized Service Standard
Service Competitive Priorities Delivery
Speed Low Cost Customization On-Time
Delivery Flexibility Consistent
Quality Profit Margins Higher Lower Supply
Chain Design Responsive Efficient SC Design
Features Flex or Intermediate Flows Line Flows
High Capacity Cushion Low Capacity Cushion
High Inventory Low Inventory Minimize
Lead Time Minimize Cost Key SC Metrics Order
Fulfillment Time SCM Costs Upside SC
Flexibility On-Time Delivery New Product Lead
Time Inventory Investment
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Designing and Implementing KPIs
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An effective KPI effort includes two critical
phases Design and Implementation.
Active Communication Plan Throughout the Phase
I. Design
KPI Education review of available tools
Kick-off KPI Project
Understand business strategy goals
Assess Existing KPIs
Develop To-Be KPIs
Proactive Efforts to Teach the Processes to the
business
II. Implementation
Implement To-Be
Evaluate understand performance gaps
Identify lessons learned/facilitation improvement
Develop plan for continuous improvement
Monitor Live process
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The KPI Team Mission Develop and implement a
Scorecard to monitor and improve overall
business performance.
KPI Team Sponsor Controller
Team Objectives

• Determine performance metrics for the NAFTA
  Business
• Establish data collection and reporting
  processes
• Develop a target setting process including
  tolerances
• Establish detail profiles for each metric
• Implement corrective action/decision making
  process
• Establish clear roles responsibilities
• Develop process to reconcile metrics across
  levels of the organization, sites, functions
• Provide training and documentation

Finance
Manufacturing
IT
Human Resources
Leader
Leader
Facilitator
Facilitator
RD/Engineering
Purchasing
Mktg./Sales
Logistics
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Develop a High-Level Project Plan
Take care to get what you like, or you will be
forced to like what you get. George Bernard
Shaw
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Identify and Assess Current Metrics

• Is the metric SMART? (Specific, Measurable,
  Actionable, Relevant, Timely)
• Is the metric part of a balanced approach?
• Does the metric support strategic and tactical
  level goals objectives?
• Does the metric provide benefit to the
  organization (motivates behavior, serves as focal
  point for improvement, highlights performance to
  better practices, etc...)

It is not only important to measure things
right but also to measure the right things.
old axiom
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Design a Business Level Balanced Scorecard
Generate a list for review, discussion, and
decision making
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Example of Balanced Scorecard
The business level scorecard should contain 10-15
metrics representing the various perspectives and
supporting overall strategic objectives.
Include limits to define when action is required.
Use Red-Yellow-Green or Good-Fair-Poor to rate
status.
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Example of Balanced Scorecard
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Metric Profile
Develop a detailed KPI Profile for each metric
Balanced Scorecard Perspective Select the
perspective - Financial, Customer, Internal or
Learning Growth Business Process Category
What business process is being measured?-
Customer service, Inventory Mgt, Forecasting,
Prodn Planning, Warehousing, Distribution,
Freight, Training, Procurement, etc. Owner
Who is accountable for the result of this KPI?
Document Name Function Data Coordinator
Who is responsible for gathering the data for the
KPI? Document Name and Function. Data Source
Where does the information come from? Financial
Systems, EDW, DW, SAP, Controllers Book, etc.
Definition What is measured? What are the
primary components. Fit into one sentence.
Purpose Why do we measure this KPI? What is
the desired outcome?
Frequency How often is this metric reviewed?
Hourly, Daily, Monthly, Quarterly, Annually, etc.
Level of Detail What level of information is
available? By product, project group, business,
business group, country, customer, customer
segment, supplier, location, etc. Calculation
Document the formula and any special components -
average, count, mean absolute deviation,
percentage, differences, summation, etc.
Baseline Data What year, month, or other time
period was used as the baseline? Performance
Targets What performance do you require at the
end of the calendar year? How is this value
determined? - historical, business plan,
estimates, benchmarks, capacities, etc.
Tolerance What is the allowable error to the
target? Data Availability When is the data
available for updating? Data Source Details
Describe in more detail where the data comes from
- EDW tables, queries, files, external sources,
etc. Comments Include possibility of
automating data collection, issues around
gathering the data, potential resources for the
information. Include any other information that
tells the user more about the KPI.
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The Use of Supply Chain Metrics
Sometimes, you do know what you dont
know. Donald Rumsfield Former Secretary of
Defense
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Uses of Performance Measures

• Communicate expectations
• Establish metrics
• Measure and control key factors
• Track changes in performance
• Control operations

To ensure all members of the firm are working
toward the same goals.
Aligned with focus goals and objectives.
Compare actual-to-target and take actions as
needed.
Detect trends and develop plans accordingly.
To obtain desired behaviors and results.
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Using Metrics to Drive Performance
- Manage-to-Target Process -
Define KPIs, Targets, Tolerances
Reward and Recognize
Step 2
Step 3
Generate KPIs
Compare to Targets and Forecasts
Determine Root Causes
Perform Work
Step 4
Step 1
Step5
Step 6
Set/Modify Action Plan
Implement Corrective Actions
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Characteristics of EffectiveMeasurement System

• Measure more than one function or activity
• Can be used for decision-making
• Economical to obtain and apply
• Easy to understand and interpret
• Linked to strategy
• Inspires the desired response

Dont just measure cost or even revenue, cost,
profit. Include different perspectives such as
service, quality, innovation, etc...
Include trends as well as absolute measures.
Leverage automation as much as feasible. Avoid
metrics requiring people to write things down or
tally manually.
Use KISS principle. Avoid metrics which require
interpretation for scorekeeping.
For example, if focus of strategy is low-cost and
delivery reliability, dont emphasize
responsiveness or flexibility.
Is progress toward goals being made?
Smart-Measurable-Actionable-Relevant-Timely
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Some General Principles of Measurements

• Dont confuse process measures with people
  measures.
• People at all levels of the firm do better when
  they choose their own measures (subject to
  strategy checks).
• A few well-chosen measures are better than many
  measuresuse Paretos Law.
• There is a difference between data and
  information.

For example, dont give individuals productivity
goals that encourage throughput at the expense of
quality.
People are more enthusiastic and dedicated to
metrics which they select. They must understand
the competitive strategies and associated goals.
Avoid, metric of the week syndrome and
conflicting metrics which send confusing signals.
All firms create a great deal of data. For
example, movement data, inventory data,
production data, etc . To convert this data to
information the data must be processed into
something meaningful and measurable. For
example, month-end inventory units are translated
to inventory dollars using standard costs and
then aggregated and compared with goals.
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Aligning Performance and Behavior

• Motivators inspire specific behavior
• Demotivators discourage specific behaviors
• Considerations
• Intensity of response
• Duration of response

What motivates you?
For example, unattainable goals and metrics which
focus on the individual instead of the process
can de-motivate.
What makes you try the hardest?
For example, annual vs. point-in-time metrics.
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Sample KPIs
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Whirlpools Global Performance Metrics

• Total System Inventory (Asset Turnover
  Expense)
• Total System Transportation Cost (Expense)
• Total System On-Time Delivery Performance
  (Service and Revenue)
• Total Cash-to-Cash Cycle Time (Working Capital
  Expense)

The entire management team is recognized or
motivated based on these performance metrics.
Tradeoffs that improve the whole at the expense
of individual entities are common.
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BASFs Global Performance Metrics

• Days Invested in Inventory (DIV)
• On-Time Delivery - Capability (Did we say
  yes to original request) - Reliability (Did we
  meet our commitment)
• Forecast Accuracy (SOP Level)
• Planned vs. Actual Production (SOP Level)

Service Costs - Inventory
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Customer Service Scorecard BU Level
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Days Invested in Inventory
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Quality of Inventory
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Forecast Accuracy (Prod-Pkg-Loc Level)
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2007 BASF Corporation Scorecard
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It aint what you know, its what you think you
know that just aint so.
Satchel Paige
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