When I was contacted for an article on supply chain management, for publication towards the end of 2002, two topics came to mind. One of them was a good one to begin a year with, and could form the basis of a “new year resolution” article. The other topic forms the basis of this article.
Just as you would introspect about and evaluate a number of other things at the end of the “old” year, how about evaluating your supply chain? Admittedly, it takes a little more time than the six days between Christmas and New Year, but we can certainly try to lay the foundation here. Remember, you cannot hope to improve what you cannot measure, and since the buzzword is supply chain improvement / optimisation / effectiveness, we do need to look at the measures as well.
Traditional Measures Will Not Get You There
In their efforts to improve profitability or just to sustain the businesses, most companies face a dichotomy in satisfying each customer’s needs and in keeping costs under control. In this context supply chain management is mainly seen as a means to contain costs. Thus, the traditional key measure many managers apply to effective supply chain management is the cost of their supply chain operations – the lower the cost, the better the supply chain looks to them.
However, even the most hard-nosed manager will acknowledge that it is virtually impossible to do this on a sustained basis – cutting “fat” too deeply can lead you to cutting muscle – similarly profitability, market positioning, competitive advantage can be whittled away if supply chain management only focuses on cutting costs.
Even if you just focus on costs, what costs will best indicate supply chain effectiveness? The cost of inbound and outbound logistics? How about the costs of inventory carried in the various distribution centres? What about work-in-progress? While we are looking at costs, let us not forget the other costs associated with sourcing, and distribution, including manpower costs which do not get covered elsewhere. And finally, if goods hit the market late due to a poor supply chain performance, discounts and markdowns need to be considered as well in the costs incurred by the supply chain. So the thinking that cost is a straightforward measure is, in itself, an incorrect assumption – if you think so, you are probably over-simplifying or under-estimating the costs involved.
Let us then look what other measures might be available. In a previous article I mentioned the need to integrate supply chain management with the company’s business strategy, rather than treating it as a back-office function with dirty fingernails and greasy elbows. In my view effective supply chain management must work backwards from the customer needs in mind. Adopting this approach can enable companies to add financial and business value not only in the long term but sometimes immediately.
Once you look at supply chain management this way, as emanating from customer needs and being integrated into every other function of the business, you begin to realise that there needs to be another way to measure its success as well as taking the key decisions related to supply chains: location, production, inventory and transportation .
Time and space will not permit me to detail the various methodologies, but I believe it is worthwhile highlighting one as the most comprehensive, if not complete, method. Even within this there are several detailed layers, which can only be briefly touched upon here.
“From Your Supplier’s Supplier to Your Customer’s Customer”
The Supply-Chain Council’s Supply Chain Operations Reference (SCOR) model is a method of benchmarking and measuring improvements in supply chain performance. The Supply-Chain Council was formed in 1996-1997 as a grassroots initiative by individuals representing companies including AMR Research, Bayer, Compaq Computer, Pittiglio Rabin Todd & McGrath (PRTM), Procter & Gamble, Lockheed Martin, Nortel, Rockwell Semiconductor, Texas Instruments etc.
SCOR, now in its fifth version, is a cross-industry reference model that contains standard process definitions, standard terminology, standard metrics, supply-chain best practices, and enabling information technology. The SCOR model defines common supply chain management process, and matches them against “best practices”. The model was designed to enable companies to communicate, compare and learn from competitors and companies both within and outside of their industry.
SCOR includes all customer interactions from order entry through paid invoice, all product transactions (whether physical or service) and all market interactions from understanding demand to fulfilling it at each individual order level.
The model works primarily with a three-level pyramid.