Why & How to Measure Success of Value Creation in Supply Chain?

Supply Chain: Why and How to Measure Success of Value Creation in Supply Chain?

By:

Vijay Sardana

Based on my experience with various organizations, it is becoming clear that many problems related to supply chain and poor service quality is created by companies’ own team either due to ignorance, careless and their personal convenience at the cost of companies interest or taking many strategic issues lightly by ignoring the facts on ground due to lack of interest or understanding of the subject. Many Supply chain issues don’t impact cash flow immediately but gives a cumulative impact which comes as shocking surprise to many.

Analyze the supply chain in your organization

Purchasing and strategic sourcing has become top-of-mind activity for the senior executives of the FMCG and other consumer oriented companies. Effective supply chain management has therefore emerged as a crucial as well as of strategic advantage for businesses. The increasing competition due to globalization of businesses and entry of unknown competitors due to imported goods has changed the conventional approaches towards business. Any management still looking inward for solutions and not willing to change and modify past experiences due to new realities is bound to suffer.

The focus on cost of production and the surge of outsourced manufacturing have brought supply chain management to centre stage.

According to recent global survey, about 50 percent of senior executives around the world think that supply chain management to the company is ‘critical’ or ‘very important’ to sustain and survive in changing market place.

Corporations today also rely on outside suppliers more than ever, and consequently, need measurements to determine if their supplier relationships are effective.

How to measure your suppliers’ performance?

With greater importance comes greater scrutiny. For overall success of the organization the companies need hard data. Unfortunately still the perception and relations with old suppliers influence the business relations. It is important that most companies use one or the other methodology to measure the performance of both the purchasing activity and supply activities within the company, and the performance of the supply base.

In many companies, supply chain performance is not analyses. These gaps of understanding about deficiencies in supply chain impact their business interest significantly. Due to lack of data and hard facts, this leads to blame game and no one appears accountable in the absence of data.

How to build efficient Supply Chain Management System?

The following activities are extremely vital in any organization for any successful supply chain:

·    Supply chain efficiency management must be aligned with other strategic business units within the company, and with overall corporate goals;

· It should be comprehensive, dynamic and aggressive;

· It should be communicated efficiently throughout the organization;

· It should be tied to performance-based initiatives to encourage good initiatives;

· It should be backed by organizational resources to ensure commitment;

· It should be supported by technology systems to ensure transparency and effective real-time monitoring, and

· It should be led and championed by senior executives.

· Decision making related to supply chain must include the ground reality in a given context. Top management must also encourage the team members to go by facts in place of perceptions.

Efficient Supply Chain saves Cost:

Cost savings is often the most important driver for companies implementing and measuring systems. Good and efficient companies are tapping into various efficiency measures to remain competitive and improve margins.

Some of the parameters commonly used are transaction cost spent per purchase, number of suppliers per buyer, percentage of sourcing done through electronic sourcing systems, and number of suppliers being used, among others. These parameters help in projecting transparent picture for purchasing or sourcing effectiveness.

Issues in Supply Chain Management:

Delay in getting desired quantity and quality of materials is also an important parameter to check the effectiveness supply chain management. Due to delayed payments and due to poor interpersonal relations, supplies don’t respond on time. Unfortunately, these facts are not covered in management meetings because this makes the internal management accountable for these delays and high cost of sourcing.

These issues are also of strategic significance to ensure timely delivery to markets. They are however harder to quantify. Very often these measurements can be subjective, but they are vital to analyze.

Today companies have to also evaluate new ideas in supply chain to remain ahead in market place. Its impact on new product or new service development is important. It is also wise to remain proactive in bringing ideas from the supply base to the company. While doing so their impact on revenue generation and cost saving should also be analyzed. Companies that look at cost, efficiency, and strategic measures together gain a greater understanding of their supply chain and its overall impact on the organization.

According to a global survey, No more than 10 percent of Fortune 500 companies have what one can call a world-class system – one that scores high on all dimensions. If not designed properly, such measuring systems can be cumbersome, time-consuming, and expensive to develop and maintain.

Common reasons for failure of Supply Chain Measurement System:

Mindset is the biggest issue. The common observation is that most of the companies employ some type of measurement system, but often it falls off pretty quickly and companies only doing a little bit of this and a little bit of that depending upon availability of resources, technology, comfort and management attitude.

With poor measuring systems, organizations have difficulty in making right decisions and optimum allocation of resources. When you sit in a meeting and observe, what are the justifications given by concerned department or person about poor supplies? You will observe that these deficiencies are covered by giving subjective justifications, which are external to the organizations. Very often suppliers or transporters are blamed for non-cooperation and inefficiency in supply chain management.

How to implement Supply Chain Efficiency Measurement system?

Companies can still reap significant benefits from improved measurement systems even if they do not have the same resources to devote as world-class organizations do. They should measure the correct components and ensure that the measurements should reach up to a strategic level. Top management should also make it a point to review the critical parameters related to supply chain in their review meetings.

In order to achieve goals purchasing and supply departments must work closely with strategic business units in setting critical measures. One way to do this is by utilizing a “balanced scorecard”. Originally formulated by Harvard University researchers, the balanced scorecard embraces the idea that measures need to be holistic; they need to be about more than just financials.

In order to achieve a balanced scorecard four general themes guiding measurements for purchasing and supply departments should be adopted. These may include company finance, customer satisfaction, operational excellence, and innovation as its four key areas.

Within those quadrants, employees are measured on key performance indicators:

·  Cost per case per SKU;

·  Market price vs. contract price (financial);

· Number of defect-free shipments received (external customer service);

· Management of strategic vendor relationships and improving use of raw materials (operational excellence); and

·  Meeting product launch milestones and

· Percentage of sales volume achieved from new products (innovation).

In order to ensure proper interpretation, one can cover all these parameters into Amount which can be measured in objective manner. Best way to measure is convert all these observations into money terms, by adopting standard accounting practices.

The balanced scorecard is one efficient method, but many approaches can work to customize the measuring system that it supports both the strategic goals of the organization, and its quest for increased revenue and shareholder return.

What is the future in Supply Chain management?

In today’s IT enabled and globalized world, the importance of efficient measurement systems increases. Improvements in technology can enhance current systems, improve workflow and data sharing, and cut down on the time it takes to produce the measurements. Bar-coding is one of the basis tools now days.

The next phase is on-line Web technology allowing companies to access the right tools and see the required information in a more comprehensive way. It is better way of collecting information and will help in establishing standards and data definition models for supply/purchasing measurements.

Driving the popularity of measurement systems is the new tax laws, money laundering laws and other financial reporting regulations. In today's banking, auditing and stock market regulation, financial data is picked very minutely and on real-time basis. New regulations are forcing companies to have transparency in their processes. They need to have controls built in.

Growing threat of terrorism and elated security issues are also forcing better supply chain management systems to ensure traceability and transparency.

Availability of current and historical data on numbers on real-time basis is fast becoming a necessity, both to have quick comparison by shareholders as well as for regulatory requirements.

Measurement is central to all these activities, which needs monitoring and is foundation for all the regulatory activities. Without them, companies are open to all kinds of liabilities.

Illogical and unnecessary performance measurement parameters can be burden:

Extensive measurement systems with lean staff can be a burden on the work force. Over-extensive i.e. beyond actual need, measuring systems can sometimes blur what companies should focus on. This also frustrates or confuses employees.

Companies must avoid information-paralysis and need to be careful with data needs. It is very easy to get lost in the jungle of data and measurements. Very often lot of data is complied but never analyzed.

Setting and communicating clear priorities is imperative. Managers should go to the field and evaluate how data is complied and stored. Sometimes data collection itself can be expensive with very limited use. Only hands-on experience can help in avoiding this gap between field teams and senior management.

Based on the global experience of many researchers, the pros outweigh the cons overall, but there is a crucial balancing act to maximize the gains, that is how much measuring makes sense.

Measurement outcomes may not be magic numbers for business but certainly pearls of wisdom for any company seeking greater efficiency in its supply chain through a comprehensive measurement system. This leads to incremental growth in market share and cost efficiencies. Don’t expect miracle overnight because this is forcing cultural change in an organization from old way of working to new way or working.

What precautions one should have while developing Measurement systems in supply chain?

· Is measurement more important than actual work done? Can all this performance measuring occasionally get in the way of the actual work that needs to be done?

· Are purchasing managers losing sight of corporate goals in the face of increased pressure to produce records?

· How quickly it gets components from suppliers and manufactures at a low cost, does it eventually help in delivering on those promises?

· Are vendors sensitive to efficiency needs as the company wants them to become. Where are the alternate suppliers?

· Why managers are resisting the introduction of supply chain measurement systems?

Answer to these questions and their honest answers will decide which way company is planning to move in growing competitive markets.

What do you say?

Do you have supply Chain measurement systems in place in your company? If yes, when you analyzed the critical parameters last time. Have you compared the progress on various parameters between the last two meetings?

If there is no change in any parameter, it means your team has stopped learning about better options.

Any comments….