This article originally appeared in the September print issue of IMPO Magazine. To view the digital version, click here.
The right metrics enable supply management professionals to drive positive changes that can be measured. These metrics create alignment between competing objectives. The old saying “What gets measured gets done” is true. After all, if you don’t have metrics, you can’t expect to make any change.
However the right metrics executed strategically and with an integrated approach across the company will generally demonstrate the real value of the supply management function, giving the procurement department more influence within an organization and a “seat at the table.”
So whether you are asked to reduce inventory control costs or you need to reduce the number of parts in your inventory, metrics can be a solution. It can be a tool you can use to negotiate with a supplier or even ensure delivery on time to your customers. But it all starts with the types of metrics.
Types of Metrics
Supply chain metrics can cover sourcing, inventory, manufacturing, warehousing, material handling, transportation, distribution, customer service and more. If you use too many metrics, a possible outcome could be slipping into “analysis paralysis” of endlessly trying to figure out which measures to select, or trying to measure everything.
This quote, rumored to have hung in Albert Einstein’s Princeton University office, is a good warning to heed: “Not everything that counts can be counted, and not everything that can be counted counts.”
The first step is to determine your business priorities. Whether you’re trying to measure service levels from your suppliers or the consistency of your plants’ operations, supply chain professionals should focus on the metrics that measure what is most vital to your business and can be reported and understood by your stakeholders. Metrics should be linked to your company’s strategic priorities and objectives.
A metric scorecard should be used that is holistic and includes both the P&L statement and the balance sheet. Include one or two incremental projects that are truly “game changers” and will result in either solving a discrete problem or engaging in continuous improvement, or both.
Everyone in your organization should use the same scorecard – at least the same elements, if not the same targets – otherwise there is neither consistency nor agreement on performance levels, and it will be difficult to impossible to leverage any good ideas.
Metrics Drive Improvement and Change
Without a metrics scorecard to use as a roadmap, you’re just hoping that things will get better. Three case studies illustrate the importance of metrics.
One of our clients is a US-headquartered manufacturer of components for a variety of industries and the military. After a series of acquisitions that spanned more than 10 years, it now operates 26 manufacturing plants in 11 countries. As a result, there are 26 different ways to do the same thing, including buying the same common materials, such as metal, and using hundreds of suppliers for a high volume category in the U.S. alone.
The company recognized the huge opportunity it had to rationalize its operations, and asked ISM Services to develop a single, consistent scorecard for all its plants to reduce the number of machining suppliers. The scorecard will be piloted first in a few plants and ultimately rolled out to all, offering significant operational and cost benefits in the long term. It will give senior management a cohesive way to look at the business and will align with global goals concerning earnings per share and service level improvements throughout the enterprise.
As mentioned above, I’ve seen scorecards work best when they incorporate P&L, balance sheet and project objectives. Following is an example of such a scorecard at a business unit or plant level:
Metrics Create Alignment
Aligning goals and objectives is critical to getting work done efficiently and effectively. Whether you are working only with internal contacts, or working externally with key suppliers, using a metric scorecard is critical.
Case Study #2:
A client in the medical technologies and services industry we have worked with used metrics to analyze the cost of one component in a piece of medical equipment. It determined the key supplier was charging a higher price than the competition for that particular part. During contract negotiations, the supplier refused to collaborate with the company to find a way to reduce the cost.
As a result of the supplier’s intractability the medical technologies company created new specifications, writing that supplier out of the competition. Losing that part of the business was a rude awakening for the supplier to the benefits of collaboration and cooperation.
Case Study #3:
Another client that manufactures processed foods uses an internal scorecard to align its team’s efforts as they manage a supply chain that serves the 10 customers that generate more than 80 percent of the client’s revenue. The customer-centric scorecard is shared among a cross-functional team so everyone knows exactly the goals and objectives. This scorecard had shared elements between customer service, operations, logistics, back office functions and sales.
Metrics Elevate the Supply Management Function
As the supply management industry continues to educate and inform executive management about the value it brings to the corporate bottom line, the strategic use of metrics reinforces the case.
Through performance measures like order-fill rates, on-time delivery and services levels, you can demonstrate how well you are providing for your customers. Other measures will demonstrate how well you’re managing your business, such as material cost and manufacturing cost.
At the highest level, your performance measures developed through your metrics plan will show how supply management functions are increasing shareholder value by making the business more competitive and more profitable. Better measure your successes, and use the results to have a more important say in your organization.
