Lean Supply Chain and Logistics Management, page 16
Relationships beyond sales transactions
Planning for individual customer requirements
Synchronizing activities with customers
Continuously exploring new working relationships
It is readily apparent that the increased use of technology both internally and externally is the way forward to enable a leaner supply and demand chain.
CHAPTER 14
Metrics and Measurement: How Are We Doing?
According to the findings of the Bain & Company survey and report “Why Companies Flunk Supply Chain 101” by Myles Cook, more than 85 percent of senior executives say improving their supply chain performance is one of their top priorities, but fewer than 10 percent are adequately tracking that performance. Only 15 percent of the companies surveyed said they had full information on supply chain performance at their own companies, and only 7 percent go outside their four walls to track performance of supply chain activities at their vendors, logistics providers, distributors, and customers. [Cook, 2011]
Another Bain & Company survey of 300 global companies (source: www.bain.com) stated that “68 percent of managers think they have failed to optimize their supply chain savings. The ones who do—Walmart, Ford Motor, Dell Computer—all quantify performance indicators for their supply chains by setting targets that push them toward best-in-class status.” [www.bain.com, 2011]
The feedback from Bain & Company is surprising to say the least. Now that we have got your attention, what is it we are supposed to look at?
Policies and Procedures
In general, the performance of a supply chain is the result of policies and procedures that drive various critical segments of the supply chain. The question is, “How can we design metrics to manage organizations recognizing that these organizations are components of complex and highly interconnected systems?” This question is rapidly gaining importance as supply chain managers face increased pressures on customer service and asset performance. Sony, for instance, is very aware of the fact that any inventory of its products at Best Buy and Walmart ultimately affects its profitability if it remains on the shelf for more than a few days. Sony has changed its delivery metric from “sell-in” to “sell-through.” The difference is that the former metric allowed its sales department to chalk up a sale when the product was shipped to the customer (Best Buy, Walmart, etc.), whereas the latter metric chalks up a sale only when the product is sold and paid for. This is kind of like the “dock to dock” time measurement used in Lean Manufacturing. To give another example, Procter & Gamble uses its VMI process to routinely measure both its own inventory and the downstream inventory of its products.
Rationale for Considering Metrics
In a September 2007 Industry Week article “Seven Steps to Building a Lean Supply Chain,” Mandyam M. Srinivasan pointed out that as a useful guideline when developing metrics it is worth asking whether a metric under consideration:
1. Helps sell more products, profitably
2. Helps reduce investments in resources
3. Helps reduce payments or expenses over the long term
If the answer to all these questions is no, then that metric should be questioned.
There are many supply chain metrics, some of which can indicate how Lean you are. We will discuss some of them now.
Relevant Lean Supply Chain and Logistics Metrics
The SCOR model (source: www.supply-chain.org) that we discussed earlier in the book also can be integrated with your supply chain metrics as they relate to Lean. SCOR has come up with five performance attributes, all of which can be related to various forms of waste. They are: delivery reliability, responsiveness, flexibility, cost, and asset management.
Delivery Reliability
Under the category of delivery reliability, we can look for waste in terms of shipping the correct product to the correct place and customer at the correct time. This also includes looking at whether or not we have shipped the product in perfect condition and packaging, in the correct quantity with the correct documentation. The resultant metrics measured would include:
Delivery performance—Did it both ship and deliver to the client when they originally wanted it. Some companies adjust the delivery date based upon availability, change the date in their system, and measure performance based upon the new delivery/promised date. This results in an inaccurate view of delivery performance.
Order fill rate—It is important to know if an entire customer order shipped complete. This metric is typically a lower percent performance than line item fill rate, which should also be measured.
Accurate order fulfillment (at various levels of detail)—This is a quality measurement that looks at shipping errors, such as the wrong order or item(s) shipped to the customer (or the wrong quantity of requested items).
Perfect Order Measure
The culmination of this is the perfect order measure, which calculates the error-free rate of each stage of a purchase order. This measure should capture every step in the life of an order. It measures the errors per order line. For example, consider the following measurements:
Order entry accuracy: 99 percent correct
Warehouse pick accuracy: 99 percent
Delivered on time: 95 percent
Shipped without damage: 98 percent
Invoiced correctly: 99 percent
Our perfect order measure in this case would be 90.3 percent (99 percent × 99 percent × 95 percent × 98 percent × 99 percent). This can be a challenging goal to meet when set at a high level, but it is a valuable form of measurement that points out the interrelationships between different aspects of your supply chain and gives a good idea as to how Lean your total supply chain really is.
Responsiveness
Responsiveness measurements relate to how quickly your supply chain and logistics function can deliver products to the customer. They can include measurements such as order fulfillment lead time, transit times, on-time delivery, and even overall cycle or dock-to-dock time (total time key material sits in a facility, which is a good measure of how Lean your organization is).
Flexibility
This is a measure of your supply chain’s agility and response time when there are changes in the supply chain. As we know, there can be many unanticipated changes caused by economic, environmental, political, and other issues that make this something that can be used for a competitive edge.
Cost
It is, of course, important to manage your supply chain and logistics costs as that is a sign of potential waste. These measures would include cost of goods sold (COGS), total supply chain and logistics cost (in dollars and as a percent of revenue), transportation and distribution costs, warranty/returns, and a host of other individual costs.
Asset Management
These metrics look at how effectively a company manages assets to meet demand. This includes fixed assets and working capital. Metrics include order-to-cash cycle, inventory, and asset turns.
Balanced Scorecard
As there are literally hundreds of potential metrics to measure in the supply chain and logistics function, the use of the balanced scorecard approach can help to narrow it down.
A balanced scorecard is a tool that comes from the principles in the original Malcolm Baldrige Quality Award Criteria, stating that effective leaders take a balanced look at key results measures of an organization instead of relying too much on financial measures, which provide an historical look at organizational performance. So the basis for this tool is that business results are integrated and that management should not view one measure by itself without considering the relation to other results. A balanced scorecard looks at four different views of the business:
1. Financial—To succeed financially, how should we appear to our shareholders?
2. Customer—To achieve our vision, how should we appear to our customers?
3. Internal business processes—To satisfy our shareholders and customers, at what business processes must we excel?
4. Learning and growth—to achieve our vision, how will we sustain our ability to change and improve?
Objectives, measures, targets, and initiatives are developed for each of the identified perspectives to ensure success.
Finding the Right Metrics for Your Company
As competition increases and market forces continually change, supply chain performance management is a critical area for companies to help sustain and gain competitive advantage by enabling an agile, Lean, and efficient customer-oriented supply chain. One of the first steps in the Lean journey is to identify Lean project objectives that tie to overall business strategies and objectives, and this includes metrics to measure whether or not your company is successful in attaining these objectives.
As they say, “If you can’t measure something, you can’t improve it.” In some cases, even if you are measuring performance, you may be measuring the wrong things. Examples of where this might occur include where engineering designs products that are without a Lean supply chain in mind; accounting focuses on measures for individual processes, but does not consider the performance of the entire process; sales focuses primarily on booking orders without regard for what product mix was planned to be sold and produced; and plant management is focused on shipping dollars, efficiency, utilization, and overhead absorption metrics that go “head to head” with the goal of reducing cycle time and customer satisfaction.
Metrics Framework
In “Supply Chain Metrics that Measure Up—Building and Leveraging a Metrics Framework to Drive Supply Chain Performance,” authors Faldu and Krishna point out that a metrics framework is needed that is balanced across all supply chain areas (demand planning, customer management, warehouse management, etc.). This type of framework ties the individual supply chain processes to the overall business strategy of the company. Their framework includes the following, logical steps:
1. Establish the right metrics—They should be reliable, valid, accessible and relevant.
2. Link metrics to overall strategic objectives—This is very important so that you know your supply chain is in alignment with the company’s mission and strategy.
3. Create a detailed metrics bank—This includes a set of related metrics that relate to each supply chain process and maps the metric to the person who is accountable and responsible for its measurement and performance. [Faldu and Krishna, 2007]
Once this framework is in place, the authors point out that it is important to leverage it by using cause and effect to gain insights, such as what metrics can ensure product availability on the shelf.
Financial Impact of Metrics
Next there is a need to quantify the financial impact of supply chain metrics. For example, link cash-to-cash cycle to return on assets. This helps executive management to better understand the links between supply chain performance and overall business financial performance.
Review Scorecard during S&OP
Finally, Faldu and Krishna point out that it is important to review this scorecard as part of the S&OP process. [Faldu and Krishna, 2007]
The benefits of this type of supply chain metrics framework are better alignment with corporate strategies and objectives, better collaboration internally and externally with customers and suppliers, an increase in productivity, and greater commitment and ownership of metrics and targets.
Dashboards to Display and Control Metrics
A very common way to measure, analyze, and manage supply chain performance is with the use of a dashboard. The dashboard can be as simple as data manually collected and put into a spreadsheet with some graphs, to a more automated, visually pleasing dashboard generated by an ERP system. A supply chain dashboard helps in decision making by visually displaying in real time (or close to it) leading and lagging indicators in a supply chain process perspective.
Indicators
The metrics used in performance dashboards are typically called key performance indicators (KPIs). They usually fall into one of three categories:
1. Leading indicators—have a significant impact on future performance by measuring either current state activities (e.g., the number of items produced today) or future activities (e.g., the number of items scheduled for production this week)
2. Lagging indicators—measures of past performance, such as various financial measurements or, in the case of the supply chain, measurements in areas such as cost, quality, and delivery
3. Diagnostic—areas that may not fit under lead or lagging indicators but indicate the general health of an organization
Application Areas of a Scorecard
The dashboard, versus a scorecard, is more operational in nature and reviewed more frequently. More often than not, according to W.W. Eckerson in his book Performance Dashboards: Measuring, Monitoring, and Managing Your Business, dashboards are used in three major application areas:[Eckerson, 2005]
1. Monitoring—Make sure things are in control by watching the dashboard metrics.
2. Analysis—Look at performance data across different dimensions and levels to get to the root cause of issues.
3. Management—A mixture of performance, diagnostic, and control indicators are reviewed by executives, managers, and staff.
The dashboard allows for more granular detailed analysis, in addition to the aggregation functionality displayed in the dashboard view.
We can then conclude that it is critical to set meaningful, relevant, and attainable targets to ensure that everyone is focused on a Lean supply chain, but at the same time, be cognizant of the fact that you do not want to create “paralysis by analysis” where people end up focusing more on the numbers than on the customer.
CHAPTER 15
Education and Training: All Aboard the Lean-Train
Most of the Lean training and implementations that I have facilitated over the years have been delivered primarily by using the train-do method. This involves starting with some initial basic training in Lean concepts and tools. This is typically followed by team-based “critical thinking” using processes such as value stream mapping and brainstorming sessions to come up with areas for improvement. The recommended improvements are then implemented by the team using Lean concepts and tools through scheduled kaizen events.
This type of training, combined with my university experience as an adjunct professor, has enabled me to come to some conclusions of what works and what does not work.
There are certain training methods and tools that can be successfully applied to Lean, including its application in the supply chain and logistics function.
Training Methods
Traditional Methods
Raymond A. Noe, in his book Employee Training and Development, points out that traditionally there have been three major methods for training: (1) presentation, (2) hands-on, and (3) group building. The train-do method typically combines all three methods to some extent [Noe, 2002].
Presentation Method
The presentation method is where the group is passive and primarily listens to information presented to them through lectures supplemented by audiovisual means (e.g., slides and videos). This is typically one-way, from the trainer to the audience. It is a relatively inexpensive, efficient way to transfer knowledge to a large group.
This method can have variations, such as team teaching, guest speakers, and panels to make them a bit more interactive.
Hands-on Method
Hands-on methods usually require the trainee to be actively involved in the learning process. This method can be in the form of on-the-job training (OJT), simulations, case studies, business games, role playing, and behavior modeling.
OJT can be used for new or inexperienced employees who need to get up to speed on a new job, taught how to operate a piece of equipment, or for cross-training purposes. This can be taught by a current employee, by apprenticeship, or self-directed learning. These days, you do not see as many apprenticeship programs as in the past. The most common reason given seems to be that “it is hard to find good people to develop.” However, qualified candidates can still be found in skilled trades and are typically sponsored by the company or union.
To be effective, the trainer should have lesson plans, checklists, procedure and training manuals, and progress report forms available at the time of training.
In this age of the Internet and Intranets, self-directed learning can be advantageous as trainees can learn at their own pace, on their own schedule, and require less supervision. However, the trainees must have a good amount of self-motivation to complete the course.
Simulation Games
Simulations are quite useful in that they “mimic” a real-life situation and the decisions made by the employee have similar outcomes to what would occur in the workplace. Simulations can be useful in developing teamwork, production, process, and management skills. In fact, in 2009, I developed a Lean supply chain and logistics management training simulation game available for this specific purpose (http://www.enna.com/lean_supplychain/).
