Developing An Overview of Supply Chain Performance MetricsProcess, RecommendationsMcKinseyOctober2003-2-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialThis document gives an overview of the different metrics that can be used to measure supply chain performanceThe Supply Chain CoEs objective is to define a benchmarking framework capable of:Comparinggenericmetricperformancesforuseonprojects.Capturingfurtherbenchmarkingdatainaconsistentformat.The London Shops task:Developanoverviewofthedifferentmetricstomeasuresupplychainperformance.Selectthemostimportantmetricsthatcanbeusedacrossindustries.Discusshowthemostimportantmetricslinkotheroperationalmetricswithineachstageofthesupplychain.SuggesthowthesupplychainCoEshouldcontinueconcerningthistopic.-3-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialWe used information from several sources during our projectInternal and external documents:High level benchmarking framework for supply chain performance(H.Cook):ShopStudy(March1997)accessinginformationfromavailableexpertsandpastprojects.Supply chain benchmarks and best practice (DowPolyurethane&EpoxyApril1995).Supply Chain Benchmark Assessment(March1997).Supply chain appraisal and benchmarks: (client X September1997).Discussions with supply chain CoE:GrahamColclough.AndrewMorgan.LeeSherman.DeborahHuff(CapMcKinsey).-4-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialPossible data sourcesCIPS (UK):Purchasing (& Supply Chain).APICS (US):Supply Chain.CAPS (US):Purchasing & Supply Chain (US & Legal):ResearchBenchmarkIndustryListings(http:/www.capsresearch/htm).NAPM (US):Purchasing.Kaiser Associates:Benchmark Specialist Consultant.US University Research:New global initiative (investigating entryopportunitiesBob Ackerman).-5-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialPerformance measurement is an important but complex subjectThis documents an initial step in the right direction.Companies see the need for metrics. . . . . but developing the “right” set of metrics is a challenge“If you cant measure, you cant manage, you cant motivate”Establishing the proper measures within an organisation enhances continuousNo commonly used “model”.Business issues that warrant performance measurement:Differbetweenindustries.Differwithinindustry.Changeovertime.There is no one “right” answerFocusAccountabilityCommunicationLinking strategy to action Assigning accountabilityto take action when neededMeasuring progress towards goals through interactive communication and education-6-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialWe used a generic supply chain framework as a basis for our analysis . . .Supply Chain FrameworkSuppliersPurchasingInformation FlowForecasting & Production PlanningCustomer ServiceInventory ManagementInboundLogisticsManufacturingMaintenanceMarketing &SalesOutboundLogisticsIntegrated Supply Chain ManagementCustomersThis framework aligns with the CoE POV and is also similar to framework for the supply chain diagnostics inventory database.-7-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidential. . . and concluded there are three strategic objectives we should focus on when analysing the supply chainKey metrics must give information on how a company is performing against old strategic objectives.Strategic objectives:QualityTimeCostProducts/services according to customer expectationsOn agreed timeAt reasonable costPurchasingInformation FlowForecasting & Production PlanningInventory ManagementInboundLogisticsManufacturingMaintenanceMarketing &SalesOutboundLogisticsIntegrated Supply Chain ManagementCustomer ServiceSupply Chain FrameworkNB: BoundariesNPDISupportfunctionsTailor to company specific (BSC) objectives-8-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialWe began with a brainstorming session on the key drivers for quality, time and costThe complete picture can be found in the appendix.We looked at the supply chain from the customers perspective.We brainstormed on “what could go wrong along the supply chain”:Whataredriversofperformancefromaquality,timeandcostpointofview.PriceServiceProduct qualityProduct quantityProduct deliveryLate arrival Late deliveryInventory costProduct costProduc-tion costDelivery costCustomer service costQualityTimeCost-9-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialMaking their client specific warrants attentionRespect all sources of data:Understand their relationshipsthe “causal tree”:Recognised Cross-Industry; In-Industry and In-Company similarities and differences.Blind-sidedIntuitionOpinionDiscussionSurveyFunctionalMeasuresKPIsExternalBestPracticeQualitativeQuantitativeObjective1KPIKPIKPIKPIObjective2KPIandxxxmeasure“Dualservice”measures(cost&time)“Hardwired”andtennonsPush-pull-10-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialMaking their client specific warrants attention (cont.)Recognise Cross-Industry; In-Industry; and In-Company similarities and differences.Interface the solution to the current clients measures, systems, processes and culture:.andguidemigrationovertime.Ensure accountability for collecting and actioning is clear.-11-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialProposed Supply Chain KPIsKPIs help to identify “where” the performance problem is within the supply chain, and steer towards areas to explore “why”.Accuracy(as%ofsales)Customer satisfaction% of satisfied customersTotal cycle timeTime (for customer) from placing order to receiving goods% of products delivered on timeTotal supply chain cost as % of salesCost per product sold as % of salesCostas%ofsales%ofproductsdeliveredaccordingtocustomerorder(quantity/quality)%ofcustomerssatisfiedwithservice%ofproductsorderedalreadyinstockDefectrateofproductsas%ofproduction%ofgoodsdeliveredaccordingtoorder(quantity/quality)bysupplierTimefromorderplacementtoreceptionofgoodsTimefromproductionordertodeliveryintofinishedproductwarehouseDowntimeas%oftotalproductiontime%ofgoodsdeliveredontimebysupplierCostas%ofsalesCostas%ofsalesCostas%ofsalesNumberofstockturns/yearsTotal Supply ChainForecastingPurchasingInbound LogisticsManufacturingMaintenanceInventory ManagementMarketing & SalesCustomer ServiceOutbound LogisticsQualityTimeCost%ofactivesuppliersthataccountfor90%oftotalpurchasevalueNeedtoidentifyM&SKPIsBEWARE of inter-relationships-12-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialEach stage of the supply chain has a variety of metrics to monitor operational effectivenessThese metrics help identify “why” there is a performance problem.ForecastingPurchasingInbound LogisticsManufacturingMaintenanceQualityTimeCostActualvs.forecastedsales%ofdatawhichcanbeusedwithoutmodificationintheplanningprocess%ofallactivesuppliersthataccountfor90%oftotalpurchasevalue%ofcorrectordersplaced#ofalternativesourcesofsupply#ofsuppliersinvolvedinproductdevelopment/innovation#ofsuppliersperpurchasingemployee(purchasingprofessional)#ofvendorsproductsorderedPurchasingheadcountas%oftotalheadcount%ofgoodsdeliveredaccordingtoorder(quantify/quality)bysupplier#ofcarrieralliances#ofovershipments%ofdirectmaterialpurchasesthatarenotinspectedatincomingqualityassurance,goingfromstocktodock%ofdirectmaterialpurchasesthatarenotinspectedatincomingqualityassurance,goingfromstocktoproduction%ofordersdeliveredwithoutunplannedcommunicationorspecialattentionDefectrateofproductsas%ofproductionScraprateas%ofproduction#ofchangesperproductionperiod%ofgoodsrepackagedActualvs.productioncapacityTimefromorderplacementtoreceptionofgoodsTimefromproductionordertodeliverintofinishedproductwarehouse%ofaccountspayablehandledbeforeduedate%ofaccountspayablehandedin130days%ofaccountspayablehandledin3160days%ofaccountspayablehandledin6190days%ofaccountspayablehandledinover90days%ofsuppliersconnectedviaEDIAverageactualtimetodeveloped/negotiateacontract%ofgoodsdeliveredontimebysupplierProportionofsupplierswhodeliverdailyProportionofsupplierswhodeliverfrequentlythanmonthlyProportionofsupplierswhodelivermonthlyProportionofsupplierswhodelivertwiceweeklyResponsetimetoschedulechangesResponsetimetounforeseenproblemsTurnaroundtimeonrejecteditemsAverageproductionleadtimeCurrentmanufacturingleadtimeMinimumproductionleadtimeDowntimeas%oftotalproductiontimeDowntimeduetopartsshortage(orstockoutsingeneral)HoursofunplanneddowntimeCostas%ofsalesCostas%ofsalesCostas%oftotalcostsCostoforderspurchased(rangeCostofvendortransactions(range)CostofexpediterepairmaterialsPurchasingspendpersupplierPurchasingspendperpurchasingemployee(purchasingprofessional)Costas%ofsalesCostas%oftotalsalesCostas%ofsalesCostpersaleableunitCostperunitproducedCostas%ofsalesCostperunitproducedSource:H.CookNosofstrategies,or“uptime”service-basedcontracts-13-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialIn addition to the KPIs each stage of the supply chain has a variety of metrics to monitor operational effectiveness (cont.)Inventory ManagementMarketing and SalesCustomer ServiceOutbound LogisticsTotal Supply ChainQualityTimeCost%ofproductsorderedalreadyinstockDefectrateofproductsas%ofproductsleavingwarehouseAccuracyofinventoryrecordsInventoryvs.servicelevelItemsininventoryas%oftotalunitpurchasesObsoletevs.activeinventory%ofcorrectorderstaken#ofadditionalsalesfromcustomerreferrals#oforderchangesas%ofordersfilled%ofordershandledwithcommitmenttoproduct/servicedeliveryonfirstcall%ofcustomerssatisfiedwithservice#ofcomplaintsas%oftotalorders#ofphonecallstocustomerservicedevelopmentperordershipped#ofcomplaintsduetoOn-timedelivery;OrderEntry;Packaging;Productquality;ShippingError#ofcomplaintsas%oftotalorders#ofcustomercontactsperorder#ofenquiries(includingcomplaints)thatwerenotansweredtothecustomerssatisfaction#ofinformationrequestsas%ofcustomerorders%ofcallsabandoned,answeredbyrecording,delayed%ofcustomercontactthroughcustomerservice%ofcustomerfollow-uphandledbyCustomerServiceRepresentative;DepartmentManager;FieldRepresentative;ResponsibleManager%ofinvoicescontainingerrors%ofordersdeliveredcompleteandwithouterror(orderfillrate)%ofordersthataredamagedonarrivalatcustomersite%ofrespondentsthatcanhandlecomplaintswithouthandingofftootherperson/dept.Average%ofdisputedinvoices%ofproductsdeliveredaccordingtocustomerorder(quantity/quality)Degreeofutilisationoffacilities(%)EquipmentutilisationloadEquipmentutilisationweightTimefromorderplacementtostartofdeliveryCustomersatisfaction(rating)%ofsatisfiedcustomers%ofinformationoncredithistorylimitavailableOn-line%ofinformationonopen-orderhistoryavailableOn-line%ofinformationonoutstandingbalanceavailableOn-line%ofinformationonpricingavailableOn-line%ofinformationonproducthistoryavailableOn-line%ofinformationonproductIDcodeavailableOn-line%ofinformationonshippingpointsavailableOn-lineRatioofoperationslabouras%ofpassivelabourAverage#ofordersrejectedAverageproducttimeinwarehouseNo.ofdaysconsumptioninstock(A-goods)No.ofdaysconsumptioninstock(B-goods)No.ofdaysconsumptioninstock(C-goods)No.ofdayssafetystock(A-goods)No.ofdayssafetystock(B-goods)No.ofdayssafetystock(C-goods)No.ofproductswithduplicationstockPlanneddaysofinventoryonhand%ofaccountsreceivablesettledbeforeduedate%ofaccountsreceivablesettledin130days%ofaccountsreceivablesettledin3160days%ofaccountsreceivablesettledin91days%ofaccountsreceivablesettledin6190daysDeliverytime%ofproductsdeliveredearly#ofdeliveriespermanhour%ofordersdeliveredontime(asdefinedbycustomer)%ofordersdeliveredwithanaveragedelayof1monthAverage#ofdaysdelayafterscheduledshipdateTotalcycletimeTime(forcustomers)fromplacingordertoreceivinggoods%ofproductsdeliveredontimeAveragecustomerquotedleadtimeAverageleadtimefromreceiptofordertoshipmentAveragetimetakentoaccessinformationCashtocashcycleLongestcustomerquotedleadtimeNewproductintroductiontimeProductchangeovertimeShortestcustomerquotedtimeTimefromreceiptofordertoreceiptofshipmentbycustomerTimetakentorectifyincorrectordamagedordersAveragetimetakentorespondtorequestsCostas%ofsales#ofstockturns/yearCostas%ofcostofgoodspurchasedCarriedworthofexpiredlotsA-goodsasapercentofinventoryAveragestocklevelB-goodsasapercentofinventoryC-goodsasapercentofinventoryInventorycostas%oftotalassets(grossassets)MaximumstocklevelMinimumstocklevelCostas%ofsalesCostas%ofsalesCostperdelivery#ofroutemilesperdelivery#ofwarehousingfacilities#ofwarehousingoflocations%oftransportationunitsownedbycompanyCostperorderCostperrouteTotalsupplychaincostas%ofsalesCostperproductsoldas%ofsales%ofprofitfrombasepurchase%ofprofitfromincreasedpurchases%ofprofitfrompremiumpricing%ofrevenuegeneratedbylargestcustomergroup(top20%)Costperproductsoldas%ofsalesOperatingprofitpercustomeras%ofoperatingcostspercustomerTotalcostperorderTotalcostperunitproducedCostas%ofsalesSource:H.Cook-14-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialGiven the multitude of metrics we suggest to analyse supply chain performance using a hierarchy of measures. . . digging through the causal tree to improve business performance.Key KPISupportingMetricsOther OperationalMeasuresType of MeasureExampleHighest Level UseWho Uses ItForecasting accuracy (as % of sales)Integrated supply chainGeneric benchmarkingConsultantTop managementSupply chain stage manager% of suppliers connected via EDISupply chain stage diagnosticConsultantSupply chain stage managerA-goods as a % of inventorySupply chain stage diagnosticSupply chain stage managerObjectiveFind “where” the problem is within the supply chainIdentify the “why” within the supply chain stageGive more in-depth information about supply chain stage-15-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialFor example, the quality of customer service performance can be clearly measured at three different levelsQualityKey KPIsSuggested Supporting MetricsOther Operational Measures% of customers satisfied with service# of complaints as % of total orders# of phone calls to customer service department per order shipped# of complaints due to: order entry, packaging, shipping error, . . .)% of calls abandoned, answered by recording, delayed, . . .% of complaints handled by: customer service rep., department manager, . . .KPIs will be measured for generic benchmarks, whilst operational metrics will be measured by a customer service manager. . .# of complaints that were not answered to customer satisfactionAverage number of orders rejected-16-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialKey KPIsSuggested Supporting MetricsOther Operational MeasuresOutbound logistics performance . . .% of products delivered according to customer order (quantity/quality)(These can often be driven by customer service metrics)Degree of utilisation of facilities (%)Equipment utilisation (load/weight)Delivery time% of orders delivered on time (as defined by customer)# of deliveries/man hour% of orders delivered early% of orders delivered with an average delay of 1 monthAverage number of days of delay after scheduled ship dateCost as % of sales# of route miles per delivery# of warehousing facilities/locations% of transportation units owned by company. . .Cost per deliveryCost per orderCost per routeQualityTimeCost-17-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialKey KPIsSuggested Supporting MetricsOther Operational MeasuresQualityTimeCostFor maintenance, commonly used supply chain performance metrics relate to time and costThe quality of maintenance is commonly measured by lag measures in terms of cost or as a production measure (downtime).We suggest the use of two lead measures that proactively monitor maintenance performance. . .Number of service contractNumber of training days for maintenance staffDowntime as % of total production timeCost as % of salesCost per unit producedDowntime due to parts shortage (or stock outs in general)Hours of unplanned downtime-18-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialJust remember . . .A large number of metrics exist, so be selective.A step by step approach to measuring supply chain performance should be undertaken in order to avoid being overwhelmed by data.The following segmentation gives us such an approach:23keyKPIsallowustoidentify“where”theproblems”existwithinthesupplychain.Keysupportingmetricsthenallowustoanswer“why”theproblemsexist.Operationalmetricsallowustogoanalysethesupplychainstageinmoredetail.The “right” set of metrics does not exist for a given industry or even a specific company. The “right” set of metrics is dynamic like the business it measures and will change with the type of industry/problem and over time. . .-19-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialNext Steps for the Supply Chain CoEAgree on how you will go forward after this project.Agreeonobjectives,scopeandaccountabilities.Eg.DiscussifeachGMTneedsitsownsupplychainmetrics.Further populate the supply chain benchmarking framework.SeeexampleforPurchasing.Championing (S. Beck/Disc. Heads). . . and roll-out.Continuous improvement process.-20-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialAppendixKPI Definitions.Causal Trees:QualityTimeCost-21-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialPurchasing Data: KPIs & Benchmarksa:CAPSResearch:ChemicalPurchasingBenchmark1997;H.Cookshopresearch.Industry SectorBenchmarking Range/Best Practice(Validate source)Average Manufacturing(Validate source)Chemicals Best Practice(Validate source)Global Chemical Purchasinga0.06%3.0%0.30%MeasureQUALITYTIMECOSTAutomotive (Global)aPharma. (Global)aEng./Constr. (Global)a%ofcorrectordersplaced#ofalternativesourcesofsupply#ofsuppliersinvolvedinproductdevelopment/innovation#ofactivesuppliersperpurchasingprofessional#ofvendorsproductsordered%ofallactivesuppliersthataccountfor90%oftotalpurchasevalue%ofpurchaseshandledbypurchasingdepartmentPurchasingheadcountas%oftotalheadcount%purchaseshandledbypurchasingfunction%spendonlong-termbasis(2yrs)%firmsusingconsortiumbuyingTrainingperpurchasingprofessional%ofaccountspayablehandledbeforeduedate%ofaccountspayablehandedin130days%ofaccountspayablehandledin3160days%ofaccountspayablehandledin6190days%ofaccountspayablehandledinover90days%ofsuppliersconnectedviaEDIAverageactualtimetodeveloped/negotiateacontract%goodsdeliveredontimebysupplierTimefromorderplacementtoreceiptofgoodsCostas%ofsalesCostas%oftotalcostsCostoforderspurchased(rangeCostofvendortransactions(range)CostofexpediterepairmaterialsPurchasingspendpersupplierPurchasingspendperpurchasingPurchaseDept.expense(per$sales)65%29%4%1%1%9weeks59%$24.8m31/10018 cos 12bn226weeks50%42%6%1%1%61%26.515/100!0 cos $23bn508720%110%61829267575%0.3%4.5%1657.9%(18%xxx)821.4%82%50%22261%97%2720.4%27%26%42hrs30215.5%11%79%33%1%19%2610/10019 cos $3.5bn459/100-22-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialServiceProductDeliveryWrongInfo.HigherPricesThanCompetitorsHigherMarginThanCompetitorsBadlySetCustomerExpectationsWrongOrderInformationUnabletoMeetCustomerDemandProducedFaultyGoodsProductsDamagedAfterMfgPriceProductQuantityProductQualityDeliveredFaultyGoodsQuality-23-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialDidNotHavetheRightMaterialsForecastsIncorrectInformationFailureHumanFailureTechnicalFailureLateArrivalLateDepartureLateArrivalInformationFailureInfrastructureFailureProductFailureWrongInformationInfo.SenttoWrongPersonInformationSentLateProductNotinStockFaultyProductHumanFailureTechnicalFailureUn-controllableFactorsInformationFailureInfrastructureFailureHumanFailureDidNotProduceAnymoreDidNotProduceEnoughInformationSystemFailureTechnicalFailureHumanFailureCouldNotProduceToCapacityTotalCapacityTooSmallOtherProductionPrioritiesMaterialsNotDeliveredWrongMaterialsDeliveredMaterialsDeliveredLateSuppliersForgotWeDidNotOrderSuppliersGotOrderWrongWeGotOrderWrongSuppliersDeliveredLateWeOrderedLateTime-24-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialPurchasingCostCustomerServiceCostInventoryCostDeliveryCostProductionCostTooMuchStockWrongTypeofProductsObsoleteStockInfrastructureStockHumanResourcesCostsUsedMoreExpensiveMaterialsMaterialsArrivedLateHumanFailureTechnicalFailureHumanResourceCostMaintenanceCostComplaintsWastagePlanningUsedMoreRawMaterialsHigherCostThanCompetitorOrderedLateDifferentMaterialsPeopleSystemsSameSuppliersWorseDealDifferentSuppliersSkillsProductMOTPromotionSalesVolumesLowerDontKnowHowtoNegotiateManySuppliersCost-25-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialDefinitions for the Supply Chain KPIsForecasting:Accuracy(as%ofsales).Purchasing:%activesuppliersfor90%spend.Timefromorderplacementtoreceipt.%ofgoodsdeliveredontime.Costas%sales.Inbound Logistics:%ofgooddeliveredaccordingtoorder(quantity/quality)bysupplier.Timefromorderplacementtoreceptionofgoods.%ofgoodsdeliveredontimebysupplier.-26-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialBack Up Panels-27-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialDrivers and KPIs are however linked throughout the supply chainThey form a “causal tree” along the supply chain which varies between industries and over timeThey do not simply drive and explain just quality, time or cost, they may drive or explain all threeWe have simplified the tree in this presentation:WehaveleftoutthelinksandkeptthemodelonagenericlevelWe have not developed a “perfect” modelFunction/Process StageQualityTimeCost-28-LShop/Ldn/22Oct97Rp-fc/kfMcKinseyProprietaryandConfidentialThese operational metrics should be used with careIdeally they should support key KPIs by explaining why performance is meeting/below expectations.They should also give an in-depth picture into how well each supply chain stage is performing.However, their use calls for judgement:Theyvaryacrosscompaniesandindustries(whichexplainsthelargequantityofmetricsavailable).ManyarenotdirectlylinkedtokeyKPIsbutareusefulsecondaryindicatorsofperformance.Theydonotnecessarilylinktoperformanceatjustonestageinthesupplychain(butaccountabilitymustbeassignedtosomeonewithinonestage).Forexample:inaccurateordermakingcouldleadtomoretimebeingspentonpuchasing,suppliersdeliveringthewronggoodsand/orsuppliersdeliveringthegoodslate.