Performance Measures of SCM
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Introduction
The Council of Logistics Management defines Supply Chain Management as “the process of planning, implementing and controlling efficient and cost effective flow of materials, in-process inventory, finished goods and related information from point-of-orderto point-of-consumption, for the purpose of conforming to customer requirements”. The fundamental objective of a high performance of supply chain is to produce products to match customers’ demand cycle, while producing the greatest value possible to the customers. A number of technologies and managerial attention has gone into improving supply chain performance. The increasingly competitive environment calls for speedy, cost efficient, accurate and reliable supply chains. Supply chain management is no longer a matter of operational and functional areas of the firm. Today, it is a strategic issue demanding top-level management attention. The supply chain can have huge leverage on the creation of customer value. Supply chains will fight the new battle for market dominance; as such measurements around the supply chain are critical. If we look at competition today, it is supply chain versus supply chain. This brings out a situation that competitors might focus on developing superior supply chain Performance. Accordingly, companies will have to find or develop metrics to measure performance of supply chain.
Process measurements
Key Performance Indicator (KPI) is a performance measure, a yardstick for tracking progress and a tool to achieve a goal. KPI encompasses all areas of Business — Demand Management, Supply, Conversion and Delivery.
The best practices of business are:
Key Performance Indicator (KPI) is a performance measure, a yardstick for tracking progress and a tool to achieve a goal. KPI encompasses all areas of Business — Demand Management, Supply, Conversion and Delivery.
The best practices of business are:
• Quantitative and qualitative metrics ;
• Areas include cost, quality, customer satisfaction
• Best-in-class standards for the defined processes
• Used to measure against current business process
The scoreboard indicates the Key Performance Indicators of a supply chain and compares the performance of a typical organisation with that of the best-in-class as a benchmark.
No. Attributes Typical Superior
1. Delivery performance 50% 95%
2. Fill rates 60% 98%
3. Order fulfilment 50% 90%
4. Production flexibility 45 days 20 days
5. Logistics costs to sales 10% 3%
6. Inventory days of supply 60 days 22 days
7. Inventory turns 6.5 12
8. Nett asset turns 3 19
The SCOR Model
The Supply Chain Operations Reference model, better known as SCOR is helping global manufacturers rethink their companies into best-of-class operations. The SCOR model is a process reference model that has been developed and endorsed by the Supply Chain Council, as the cross-industry standard diagnostic tool for supply-chain management. It enables users to address, improve and communicate supply-chain practices within and between all interested parties. It is a management tool spanning from the supplier’s supplier to the customer’s customer and a toolkit that can be used to define, measure and manage supply-cain processes. The SCOR model is a pyramid of four levels that represents the path a company takes on the road to supply chain improvement.
• Level 1 – it provides a broad definition of the plan, source, make and deliver process types and is the point at which a company establishes its supply chain competitive objectives.
• Level 2 – it defines the 17 core process categories that are possible components of a supply chain. A company can configure both its actual and ideal supply chain by selecting from these core processes.
• Level 3 – it provides a company with the information it needs to successfully plan and set goals for its supply chain improvements. Planning elements include process definitions, target benchmarks, best practices and system software capabilities to enable best practices.
• Level 4- it focusses on implementation, when companies put specific supply chain improvements into play. It defines practices to achieve competitive advantage and to adapt to changing business conditions.
Survey of top performers
The Performance Measurement Group (PMG), a subsidiary ofPRTM Management Consultants, have released results of the first survey in its 1900-2000 Supply Chain Management Benchmarking Series. The survey is based on the SCOR model; PMG examined best-in-class industry performance of customer-facing and internal-facing measures in supply-chain management. Customer-facing measures, such as production flexibility and delivery performance, quantify how well a supply chain delivers products to the customer. Internal-facing measures, such as total supply-chain costs and cash-to-cash quantify how effectively an organisation uses resources in creating value for the customer or how efficiently a supply chain operates. These measures help companies to evaluate the full scope of their supply-chain performance against best-in-class. The results are based on data from 110 subscriber organisations from America, Europe, and Asia in chemical and pharmaceuticals, computers and electronic equipment, defence, industrial, telecom equipment and consumer packaged goods sectors. Major findings of the survey are:
• Manufacturers are more accurately adjusting forecasts and production cycles to respond to rapid changes in demand. Best-in-class performers now operate with less than 40 days of inventory throughout the supply chain.
• Leading companies have cut their supply-chain management costs to between 4% and 5% of sales. They are adopting innovative practices such as exploiting the Internet to integrate information and decision-making around the globe.
• Cash-to-cash cycle time for best-in-class companies is less than 30 days. Companies pay their suppliers quickly, collect from thier customers just as quickly and move inventory continuously.
• Best-in-class upside production flexibility has dipped below two weeks and in some industries it is less than a week.
Performance of Indian industries
Prof. M. G. Korgaonkar, Head — School of Management, IIT Bombay, in his article “Logistics and Supply Chain Management in India” has reported his findings as under:
• The total logistics cost in the country is estimated at 4.59% of sales and 10% of value added.
• Nearly 60% of the logistics cost is transportation (35%) and inventory costs (25%); the rest is due to losses (14%), packaging (11%), handling and warehousing (9%) and customers’ shopping (6%).
• A growing number of manufacturers are taking proactive and reactive steps to control logistics cost and improve customer service.
• There are major transportation and other infrastructural bottlenecks related to SCM in India, including roads, railways, ports, shipping, etc.
Several new SCM related activities have started in India; these include, emergence of trucking companies, information technology service, containerisation, private warehousing, multi modal transport operators, inland container depots, container freight stations and third-party logistics providers.
The average inventory turns is 4.5 per year. Over 50% of the inventories are of raw materials, due to inadequate control on the supply side.
Supply chain performance is far from satisfactory, in respect of lead times, inventories and deliveries. However, several action programmes have been undertaken by firms to improve supply chain performance. There is a growing trend to outsource supply chain related services; these include inventory management, transportation, warehousing, forwarding and clearing, information technology, etc. However, service providers with adequate skills, competency and technology are limited.
Conclusion
Indian companies are yet to leverage the supply chain for competitive advantage and as such there are no initiatives to measure the performance of their existing supply chain systems. However, many multi-nationals dealing in FMCG are fully exploiting the benefits and are also moving towards Web-enabled supply chains. In view of globalisation and liberalisation of the economy including EXIM policies, Indian companies are being forced to change their ways of doing business to meet the competitive pressure. In the recent past, many progressive companies are re-engineering their business processes and exploiting the use of Information Technology to challenge the ever-increasing competitive pressures in the market place. In this context. Supply Chain Management initiatives could be a competitive tool and measuring the performances against industry standards would go a long way in achieving international standards.
References
• SCOR Overview : Supply-Chain Council, Inc., USA.
• What’s SCOR : Article by Mr. David Blanchard, Senior Editor, Evolving Enterprise, Winter 1998.
• Survey : Top Performers cut SCM costs to 4% of sales-Article on SCM Survey from the Internet.
• Logistics and Supply Chain Management in India : Article by Prof. M. G. Korgaonkar, IIT, Bombay.
