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Supply Chain Performance Measurement: The next frontier of supply chain analytics

By Jessie Chimni 26 Jan 2009 | SearchSAP.com SAP news, tips and expert advice Digg This!     StumbleUpon     Del.icio.us

Supply chains are becoming increasingly global and ever more complex, as organizations try to support strategic management practices such as entering new markets, increasing the pace of new product introductions, improving the reliability and speed of order fulfillment . . . all the while trying to lower supply chain costs. For organizations to work closely with their suppliers, logistics providers, distributors and retailers, their supply chains must be streamlined and technology-enabled.

However, organizations that want to streamline their supply chains must first understand what is working well, what is not and where the opportunities for improvement are. These companies need to have a way to measure the performance of their supply chain on an ongoing basis.

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Traditional approaches of measuring supply chain performance -- scorecards, dashboards and reports showing supply chain metrics -- suffer from three shortcomings:

1) They are not linked to strategy.
2) They have a silo approach.
3) They have a flat hierarchy.

Let's examine each of these shortcomings more closely.

They are not linked to strategy. It can be difficult to see how a supply chain metric affects your overall objectives. If the metric is trending in the wrong direction, which aspect of your supply chain strategy will be affected? Without a framework that links each metric to a certain element of strategy, the context behind a metric can get lost. When such context is missing, it becomes a challenge for organizations (large ones in particular) to get everyone to see the common vision.

Next-generation Supply Chain Performance Management (SCPM) systems will need to be able to show the link between any metric and the element of strategy it impacts.

They have a silo approach. Current supply chain analytics solutions do a good job of showing the performance of metrics for individual departments, such as cost per unit purchased, percentage of on-time supplier shipment for the procurement department, or set-up times, capacity utilization and percentage of scrap for the plant.

However, this type of silo approach sacrifices the overall process and end goals in the interest of improving the performance of an individual department. As a result, functional silos are reinforced within the organization.

The key is to measure the performance of overall business process in such a way that poor performance of a departmental metric could be overlooked in the interest of increasing the overall business process performance. To achieve this, next-generation Supply Chain Performance Management systems will need to do more than show departmental metrics – they need to have a process orientation.

They have a flat hierarchy. The metrics that help you measure the overall performance of your supply chain are not standalone -- they are related to each other, sometimes in a hierarchical fashion. Such relationships help you drill down and better understand root cause more effectively.

Organizations that want to streamline their supply chains must first understand what is working well and where the opportunities for improvement are.

For example, if a hierarchical relationship were developed between outbound shipment cost metric and those metrics that affect shipment costs, your system will tell you that outbound shipment costs are trending up despite the carrier rates trending down due to lower fuel costs, because your express freight shipments in a certain division are up significantly month over month. However, most current supply chain analytics have no way to define such relationships. Next-generation Supply Chain Performance Management systems of tomorrow will need to be able to define and show relationships between metrics.

What supply chain performance management systems must include
All these issues need to be addressed by next-generation Supply Chain Performance Management systems. Such systems should include three capabilities: an analytics framework; a process orientation; and linkages.

Analytics framework. The ideal SCPM system should allow a user to define a complete framework for supply chain analytics. This framework should include:

• overall supply chain objectives;
• the top-line metrics that affect the objective;
• the description, targets and acceptable range for each metric; and
• a list of reports where the metric can be found.

Process orientation. The ideal SCPM system should support a process orientation. The worlds of procurement, manufacturing, engineering, finance and other departments are connected, but looking at today's analytics solutions, the relationships between these worlds are not well understood. This leads to local optimization at the expense of the performance of the overall process.

SCPM should address this by enabling a user to view all key metrics, current performance and recent trends for a process, not just for a department. By configuring the metrics in the SCPM framework, new metrics can be added to this orientation as the company becomes more skilled in measuring and improving the performance of their business processes.

Linkages. An ideal SCPM system should use the analytics framework to define linkages between two metrics that are related to the business process but associated with different departments. In addition, the system should be able to show linkages of any metric with lower-level metrics within the same department.

These inter- and intra-department linkages help users do a better job at root cause analysis and identify the key issues/metrics affecting objectives and targets. As a result, an organization's ability to perform operational analysis is significantly enhanced.

In addition, most SCPM systems offer a window into the past but have no way of showing how a related metric would be affected if you moved a certain metric up or down by a certain percentage. Without this capability, managers can't easily tell how much to change a certain process (and related metric) to bring the supply chain performance back into acceptable values, nor which tradeoffs they would have to make elsewhere. Next-generation Supply Chain Performance Management systems will use predictive modeling capabilities to address this issue.

Because current SCPM systems provide role-based dashboards and scorecards, they have primarily been developed in-house by the IT organization using business intelligence (BI) tools. However, to address the requirements listed above, SCPM systems of tomorrow will have to come from vendors as configurable packaged applications.

With all these new SCPM capabilities, an organization will be able to measure the effectiveness and efficiency of their supply chain and make better decisions to streamline the supply chain and align it with the organization's overall objectives. Such SCPM systems will enable supply chain executives to move from a mode where they are managing crisis to one where they are managing opportunities.

About the author: Jessie Chimni is vice president of services at Bristlecone, a global supply chain consulting firm. Bristlecone is working closely with SAP to bring the next generation of SAP's Supply Chain Performance Management solution to market. The product, called SAP BusinessObjects Supply Chain Performance Management, is expected to ship to select customers this quarter.

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