by Robert M. Kanze, August 2005.

During the last two decades, we have witnessed profound changes in all aspects of supply management. These changes have forced and have been forced by broad and often-wrenching changes in the domestic and global economies as well as changes in the technologies we use to manage their activities. Among these changes four stand out:

• The transition to a global business environment.
• The drive for continuous improvement.
• A tightening focus on the activities that most affect bottom-line results.
• Software that automates much of the “back office” transactional effort.

In the best organizations, these forces have driven an increasingly holistic view of all functions and the realization that each must work in concert with all others, and with suppliers and customers, if we are to serve our firms’ missions most effectively. Further, this realization has underscored the absolute necessity for timely and effective measures of all activities we perform. No longer can we manage primarily from our “back pocket” of traditional responses and organizational folklore.

So, what do these developments mean for the measures we use to assess the state of our supply chain management? A review of the work by supply management professionals and my direct experience consulting to enterprise leaders show two major trends and several key considerations as we rethink supply measurement effectiveness.

“Internal-Vertical” Measure Alignment

Our performance measurements should first derive from and thus directly support our organizations’ strategic goals. That is to say, these measurements should flow from the top down, a set of “internal-vertical” measures. The flow downward might look something like the following hypothetical example:
• Be the preferred supplier of widgets to the world.
o Offer higher service levels faster and at lower cost to the customer.
? Improve operating margins.
• Reduce order costs.
o Decrease order fulfillment cycle time.

Note that each measure becomes more granular and function-specific as the vertical descends.
Another way of visualizing the impact of strategic objectives on these measures is to compare them with the SCOR Level 1 metrics in version 7.0 of the Supply Chain Operations Reference Model. These metrics include performance attributes such as reliability, flexibility, and cost, and many cross multiple supply chain processes. SCOR Level 1 metrics are important since they represent “best practices” thinking across a broad spectrum of supply management professionals.

According to Larry Lapide, strategic objectives will also differ with our organizations’ states of development and current competencies. For instance, start-ups must develop excellence within each operating unit (manufacturing, logistics, customer service, etc.). As an organization matures, it will also require cross-functional and inter-enterprise process excellence. The need for vertical alignment of our supply management measures is further reinforced by the recent work of Phillip Carter, Robert Monczka, and Trish Mosconi, who found that “…performance measures must be aligned vertically with corporate goals and horizontally with strategic business units (SBUs) and other functional units.”

“External-Horizontal” Measure Alignment

We can also infer from Carter et al. the need for “external-horizontal” supply performance measurements that consider effectiveness in relations with our webs of supply (upstream) and market demands (downstream). Lutz Kaufmann’s concept of a Cross-Balanced Scorecard (X-BSC) is one way of monitoring these performance metrics. In this, Kaufmann extended the Balanced Scorecard (BSC) developed by Robert Kaplan and David Norton at Harvard Business School in the early 1990s outside of the enterprise to include its strategic supply partners. Further, just as with the original BSC an important part of the X-BSC is its customer perspective component. The X-BSC rightly recognizes that any system for measuring supply management performance – or the performance of any other function for that matter – must acknowledge that the function’s value to the organization ultimately comes from how well we meet the needs of the end customer.

Following the notion of customer perspective, when considering supply performance measure design we should account for how the customer base actually drives performance through our enterprises and back across all nodes of supply. Steve Geary and Jan Paul Zonnenberg believe the ultimate goal is the customer driving the entire supply chain, and not just manufacturing. Their vision is one of “make-to-order” excellence being the Holy Grail of supply management, with techniques like make-to-forecast, just-in-time, lean manufacturing, postponement manufacturing, and total quality management being interim means of getting closer to the customer. Dell Computer is often held as an example of an enterprise well on the way toward this goal.

Other Considerations in Performance Measure

Design
Geographic Scope of the Supply Chain
Do our supply chains compete on a local, regional, national, or global basis? This consideration continues to march rapidly toward a global basis, for goods and increasingly for services too. The rare exceptions are those items that source from only a very few places or firms, such as diamonds or green coffee. Currently, an assumed global supply scope is the planning basis for measures implemented by most of the best practitioners.

Accounting Measures versus Strategic Measures
Understandably, we use accounting measures expressed in money units (dollars, euros, yen, etc.) as the near-universal scorekeeping language of performance measures, including supply chain performance. Unfortunately accounting measures are much more expository than predictive. Using accounting measures alone to gauge performance is a bit like driving a car by watching the road through the rear-view mirror: it is easy to see where we have been but much more difficult to determine if we are currently headed in the right direction. Further, accounting measures are better suited to monitoring operational and financial performance (return on assets, inventory turns, etc.) which is not necessarily the same thing as illuminating good strategic performance (brand rankings, “most admired” in an industry, etc.). Finally, accounting measures for supply chain performance have an almost exclusive focus on cost savings or cost avoidance. Savings and avoidances are certainly worthy, insofar as they improve the bottom line. Savings alone, however, do nothing to help us build the business while the right supply chain strategic measures can and often do so.

In the best-managed firms, strategic and accounting measures are used together, with a clear understanding of what each delivers to the area under evaluation. SCOR Level 1 metrics (for example) include both accounting or “internal-facing” measures like supply chain management cost and cash-to-cash cycle time, and strategic or “customer-facing” measures like perfect order fulfillment and upside supply chain flexibility.

Strategic versus Tactical Measures

Earlier during the evolution of supply chain performance measurement, we focused on very granular, tactical metrics like cost per purchase order, Bill of Materials accuracy, and cost variances. As with accounting measures these tactical measures were expository. In addition, many lacked strategic significance because they focused on discrete transactions rather than the relationship from the supplier through to the end customer. An additional problem for these measures was their focus on functional excellence, which sometimes ran counter to organizational strategic goals and often regarded performance in isolation from the organization’s other parts. Lapide cites the example of a logistics objective to reduce less-than-truckload shipments that can conflict with a customer service objective of on-time deliveries.

Obstacles to Effective Performance Measurement

There are many obstacles to our implementing effective supply chain performance measures and gaining their maximum benefit. They range from the problems common to all cross-functional projects like competition for scarce resources and lack of top management buy-in to those unique to the supply environment. Some of the more significant barriers of all types include:
• Lack of any supplier relationship strategy.
• Choosing measures that are not dynamic or aggressive enough.
• An almost monomaniacal reliance on software solutions, with insufficient thought to whether these solutions actually provide relevant measures.
• Lack of measurement transparency: no easy-to-understand answer to the question, “why are we doing this?”
• Limited or zero input on proposed measures from our supplier base.
These obstacles will vary in description, intensity, and number from organization to organization.

As this review shows, the forces changing the way we meet and serve our firms’ missions demand that we change how we measure supply performance. Increasingly, all functions of the firm must become strategic contributors or devolve into what Geoffrey Moore calls “context,” and become candidates for outsourcing.

Choosing what we measure and how our choices align with, or even drive, our strategic objectives becomes critical for supply chain management if it will remain relevant to the organization.

Robert M. Kanze, August 2005.

About The Author
With over 30 years of experience in purchasing and supply chain management, Robert M. (Mike) Kanze is a consultant to management and President of Cornerstone Services, Inc. in Half Moon Bay, California. Mike is a Lifetime Certified Purchasing Manager (C.P.M.) and a Lifetime Accredited Purchasing Practitioner (A.P.P.), designations awarded by the Institute for Supply Management. He holds a BA from the University of California, Berkeley, and a MBA in General Management from Xavier University in Cincinnati, Ohio. Mike is also a part-time instructor in strategic supply chain management at the University of Phoenix and an occasional guest lecturer in supply matters to the Schools of Business and Public Policy and International Graduate Studies, both at the Naval Postgraduate School, Monterey, California.