Introduction

Let’s start with a basic question: Why do we need to measure in the first place? Because (a) currently things are going great and we don’t want to deviate in the future, or (b) we aren’t doing that great and we want to improve. Either way, the motivation to measure is based on influencing a future outcome.

In the world of economics, we have the concept of leading vs. lagging indicators to help gauge past vs. future performance. And from this perspective, we realize that the current approaches to supply chain performance are mostly lagging indicators, i.e., they are good at telling you about your performance – after the fact!

But the moment we shift gears and think about the leading indicators, it starts to look like an exercise in futility, because our world (seen from the perspective of a supply chain manager) appears to be getting more unpredictable every day. So without a magic crystal ball, what can you do to ensure the desired performance in the future?

The answer is to focus on supply chain capabilities. The basis for this approach comes from the lessons learned from the Quality Revolution that began 25 years ago. By adopting the core elements of the “zero-defect” philosophy, we can improve the quality of the supply chain processes so that they are capable of managing future variability.

The logic is straightforward: Even within a world that appears increasingly unpredictable, we know that part of that world exists within our control. And by improving that part – our supply chain capabilities – we are better prepared to manage an “unpredictable event” to ensure an outcome that is favorable to us. (If you’ve been to defensive driving school, you get the idea.)

Traditional supply chain metrics fall short…

As mentioned before, we say this because too often they are an indicator of past performance. To date, most of the approaches used by companies can be grouped into two categories:

The first method is the “supply chain management dashboard” that typically groups analyses on metrics such as order fill rate, inventory turns, capacity utilization, supplier delivery performance, forecast accuracy, etc., on a regular basis (days, weeks, months, etc.)
The second method is the use of industry benchmarking surveys on these same metrics. These surveys tell companies whether they are “best-in-class”, “average” or “laggard” compared to the rest of the industry.

Limitations of the “dashboard” approach

The single biggest problem here is that it is hard to connect the performance indicators (i.e., the symptoms) to the root causes of a problem. Root-cause analysis is critical in order to pinpoint which aspect of supply chain management needs to be improved – or NOT! Why? Because it’s important to recognize that a supply chain process can be performing EXACTLY as it should, even though the metric indicates a problem. Here are a couple of examples illustrating this simple but critically important observation:

If a customer cancels an important order, both the forecast accuracy and inventory turns performance indicators are likely to be negatively impacted, even if the reason why the customer is canceling the order has nothing to do with the quality of the supply chain management process itself (it may be, for example, that this order was itself related to an end consumer order that eventually got cancelled).
If a supplier imposes an unexpected supply restriction with limited advanced notice (for example, production was affected due to an act of nature), the production cost and order fill rate metrics are likely to suffer – even if the company has optimally managed the shortage situation by allocating the short supply to priority customers and providing forward visibility to the other customers on the updated delivery dates.

Thus, the first key conclusion we can draw from the above: End result metrics are useful to capture how well a company is performing globally under specific market conditions – but pause and carefully consider – before using them to diagnose whether a particular supply chain management process is performing well or not.

This brings us to the next issue…

Limitations of the benchmarking approach

If you agree with the first conclusion, then the cautionary language about “specific market conditions” should act as a strong qualifier in using benchmark data. While this kind of data helps to provide a comparative assessment, industry benchmarks must be used judiciously to make sure you are comparing apples with apples!

Furthermore, at ChainLink, we believe that supply chain offers unique opportunities to create differentiated service models, and based along this thinking, even if two companies operate in the same industry, their business model and their ecosystem can differ significantly in several aspects, such as the number of products or options, the type of products, the type of customers, their geographical coverage, their channel strategy, etc. For example:

A company that has decided to increase its market share by diversifying its products portfolio is likely to demonstrate lower inventory turns than its competitors. But this does not necessarily mean that its supply chain is underperforming (rather it will be a consequence of a differing strategy).

Here again it is difficult, or even impossible to associate the relative impact of each of these characteristics to the end results/performance indicators. (Plus, we encourage companies to think like a market leader who must proactively create their own metrics instead of reacting to someone else’s metrics.)

This leads us to our second key conclusion: In most cases, benchmarking analyses focused on end result metrics do not accurately reflect a company’s supply chain management real competitiveness.

…and thus, we need to do more.

Our objective isn’t to diminish the value of the dashboard or benchmark approaches. Within the global SCM performance management journey, that is still embryonic. They are a good start. We are simply pointing out the caveats that need to be applied, and the fact that relying exclusively on these two approaches isn’t enough.

If we truly want leading indicators of supply chain performance, then let’s use what we’ve already learned from the quality initiative: It isn’t about discovering that we have a quality problem after the fact – instead, it’s about ensuring a prevention-oriented process that produces zero defects!

So the take-away from 25 years of cumulative learning on this front is to focus on the process (or set of processes for which we are using the term “capability.”)

Here is an example of a questionnaire that highlights 10 key capabilities that are necessary for any supply chain to achieve maximum performance:

Does your company have at any time an accurate and exhaustive visibility on all your supply chain problems (e.g. current or anticipated backorders, current or anticipated capacity overloads, current or anticipated supply shortages, current or anticipated excess inventories, etc.)?
Are you capable of resolving these problems in near real time without creating more damaging ones (e.g. ensuring on-time delivery by using air freight, thus generating a negative margin on the sale)?
When a supplier calls to inform of a late delivery, are you able to immediately assess the possible negative impact on downstream operations (e.g. production, transportation, warehousing, customer delivery, and other supplier deliveries from associated components), and immediately make the necessary decisions to restore an optimal balance between demand and supply at each point?
Are you able to make a real-time, reliable and optimal delivery promise to a customer even when you don’t have inventory available at the location where the shipment usually occurs?
Does everyone involved in supply chain management share a common vision and understanding of the process capabilities necessary to achieve maximum business performance?
Are you certain that your physical supply chain network is optimally designed to minimize your total operating costs under current business conditions?
Are your financial plans systematically adjusted when your demand, inventory or supply plans are updated to reflect new opportunities and constraints?
Can you guarantee the systematic feasibility of your supply plans, in other words can you guarantee that they respect all supply constraints inside the company as well as in upstream supply chain nodes (e.g. 1st tier suppliers, 2nd tier suppliers, etc.) across the entire planning horizon? (Of course, that implies that the data on these supply constraints is accurate and exhaustively considered when generating a supply plan.)
Do your suppliers effectively utilize the requirement forecast you send them on a regular basis to plan their operations, or do they just dismiss it?
Are you certain that all existing intelligence on future demand (available in customer planning systems, in customer brains, in market trend analyses, in the analysis of macro economic factors, etc.) is systematically included in the sales forecast?

Chances are that the above test will reveal some gaps in your current capabilities. While the bad news is that you may be currently delivering a less-than-optimal service to your customers at a less-than-optimal cost, the not-so-bad news is that you are not alone. Indeed, only a handful of companies today can claim to have a fully capable supply chain management process. All others are still in the process of digesting the flurry of structural changes (e.g. globalization, outsourcing, offshoring, etc.), new methodologies (e.g. collaborative planning, constraint-based planning, consensus forecasting, etc.), and enabling technologies (RFID, Advanced Planning Systems, etc.) that continue to reshape the supply chain landscape.

What is a capability-based approach?

A capability-based approach places emphasis on the process characteristics required to systematically deliver the best possible outcome consistently (e.g. the best possible order fill rate, the best possible inventory turns, the best possible capacity utilization, the best possible supplier delivery performance, the best possible forecast accuracy, etc.)

Is this the same as a “best practice?”

Well, yes and no. Yes, because technically the label is a correct description. No, because of what passes for ‘best practices’ today. To appreciate the sentiment, the following excerpt is how the late Phil Crosby had reacted when the Quality Digest web site was requesting readers to submit their personal definition of “quality.”

The problem with the quality business has always been the lurking impression that we’re talking about varying degrees of “goodness.” In the secular world, people refer to “high-quality” restaurants and “low-quality” products and everyone pretends to know what that means. It’s OK for anyone to use words any way they wish. That’s their privilege. But those of us who have to make quality happen must have a definition that’s manageable and measurable. “Goodness” is neither. I have always defined quality as “conformance to requirements”; the ISO 9000 procedures use that definition also. This lets us measure the price of nonconformance (PONC) and place quality management on the same level as everything else that’s measured financially. Then we can see progress or lack of it; we can see where the problems originate and can contribute to the organization’s financial success.

For a capability-based approach to work in Supply Chain Management, we must ensure the following:

For each process or set of processes (that represent your core competency), there must be a quality standard that it must consistently adhere to. (Again, this thinking isn’t new. In fact, the “Class A” approach used with MRP is a great example from many years ago, but needs to be updated for today’s supply chain.)
In order to implement such an approach, the quality standards must be specific and be manageable. Finding the right balance isn’t easy. But rigorous, systemic thinking can yield the few key criteria that are relevant to ensuring that your core process or capability is truly, in fact, a best practice. (This appears to be the main drawback of the SCOR reference model where the process is decomposed and analyzed to such great detail that users can no longer see the ‘forest for the trees.’)
Finally, it must provide a global perspective, because the single biggest challenge in supply chain is to ensure alignment across the functional (and now, enterprise) boundaries.

To expand on the last point, if management fails to grasp a holistic view of supply chain performance, then the balanced scorecards of individual performers or functions are likely to be misaligned – resulting in performance metrics that are at best ineffective, or worse, highly counter-productive. And it happens a lot. Patrick Lencioni points out in his new book, The Five Dysfunctions of a Team, that many times teamwork fails at the executive level because department heads place more importance on achieving the goals of their department over the goals of the management team. This continues to be the single biggest challenge for effective supply chain management – a task that has become more complex as a result of outsourcing, where success requires the alignment of a larger ecosystem that often operates by the conflicting rules of “coopetition” (i.e. part cooperation, part competition.)

Conclusion

There are many performance improvement initiatives that companies take on these days (Lean, Six Sigma, etc.) to improve their capabilities. However, it still remains to be seen how companies will pull these together into a cohesive, composite performance management framework for improving supply chains. Regardless of what ‘flavor’ is right for your company, any initiative must be sustainable, i.e., it must create a continuous culture of improvement – instead of a ‘one-time’ effect. And that is the only way to ensure that your own supply chain capability is the best leading indicator of future performance.

Including the RIGHT capability-based program can be a complementary (and not competing) approach to your existing performance measurement initiative. If done right, the capability approach will guide the company’s supply chain strategy through business changes by providing a holistic or global perspective to performance management. The result yields significant short term benefits, while at the same time builds lasting supply chain excellence.