Even though the Supply Chain Reference model (SCOR) is widely used as tool to benchmark “best-in-class” management practices and standard metrics, it falls short of providing a performance management framework that a company can use to link supply chain improvements to its strategic goals. Ventana Research recommends that companies looking to move their supply chains to the next level of effectiveness take a top-down approach and use a Balanced Scorecard strategy map instead.
For more than two decades, industry leaders have been using information technology to support their major supply chain improvement programs. What started in the 1980s with material requirements planning (MRP) has expanded to cover a range of activities and processes, including IT initiatives for radio frequency identification (RFID), vendor-managed inventory (VMI), collaborative planning, forecasting and replenishment (CPFR), warehouse automation, and transportation management.
All these initiatives promise to improve the speed of supply chain transactions, streamline processes, optimize throughput and minimize risk. But few companies evaluate initiatives on how they contribute to overall corporate performance goals. Typically, those companies that have not yet embraced performance management still evaluate projects on cost-effectiveness. As a result, managers and executive sponsors are hard-pressed to demonstrate the contributions of the new initiatives to overall cost reduction and increased operational efficiency. We've also noticed that many of these initiatives have been implemented neither sequentially nor in concert with each other.
All of which underscores the key question: How do you choose which supply chain performance initiatives to do, and which to do first? Ventana Research’s answer is to start at the top with a clear performance management methodology and software tools to support it.
Performance scorecards and reference models work well. A performance scorecard is a software application that tracks progress towards goals and objectives using key performance indicators (KPIs). Scorecards can have multiple perspectives and typically apply a management methodology that defines strategic goals and objectives and maps them to specific business initiatives.
Balanced scorecards are the most popular way to measure top-level organizational performance. Developed in the early 1990s by Robert Kaplan and David Norton, the Balanced Scorecard is so named to indicate that the approach prescribes what companies should measure to “balance” their financial performance measures. Balanced scorecards contain the perspectives of finance, customers, business process, learning and growth. Within each perspective the scorecard tracks objectives, targets, measures and initiatives. These metrics in turn provide the basis for an ongoing cycle of measurement, evaluation and improvement. They also provide guidelines for corporate initiatives to improve decision-making.
Scorecards, but not necessarily the Balanced Scorecard, also are used in reference models, which are frameworks for benchmarking cross-functional business processes. Reference models integrate the well-known concepts of business process reengineering, benchmarking and process measurement. The best-known reference model for managing supply chain performance is the Supply Chain Operations Reference model (SCOR), created by the Supply Chain Council. This model contains standard descriptions of management processes it calls plan, source, make, deliver and return. It also characterizes the management practices and standard metrics that benchmark “best-in-class” performance.
Many companies use SCOR to identify and prioritize improvement opportunities because it recognizes the linkages between supply chain process elements, metrics and best practices and so helps companies better understand and measure the flow of information and physical goods. SCOR by itself has helped hundreds of companies define their supply chains, measure them and drive performance improvement.
SCOR is effective in the way it lays out the core supply chain processes, but it falls short of providing the broader performance management framework that is necessary to link supply chain improvements to a company’s strategic plan KPIs and strategic improvement goals. SCOR is limited because it does not address the many extrinsic activities that affect the supply chain, such as product development, demand generation or customer relationship management.
Ventana Research asserts that a more integrated strategic approach is needed to propel supply chain operations to greater effectiveness and to provide the basis for consistent financial results. We recommend that all supply chain improvement initiatives start with a Balanced Scorecard strategy map. Use the Balance Scorecard methodology to guide your priorities and track progress. We also recommend that SCOR results be displayed in the Balanced Scorecard business process perspective. By doing this, executives will be able to evaluate supply chain initiatives within the company’s performance management framework and manage within a proven reference model that provides linkages to strategic goals.
Cents and Sensorability
Developing a performance management framework can mitigate the risks of RFID. (11/23/05)
About Ventana Research
Ventana Research is the leading Performance Management research and advisory services firm. By providing expert insight and detailed guidance, Ventana Research helps clients operate their companies more efficiently and effectively. These business improvements are delivered through a top-down approach that connects people, process, information and technology. What makes Ventana Research different from other analyst firms is a focus on Performance Management for finance, operations and IT. This focus, plus research as a foundation and reach into a community of over two million corporate executives through extensive media partnerships, allows Ventana Research to deliver a high-value, low-risk method for achieving optimal business performance. To learn how Ventana Research Performance Management workshops, assessments and advisory services can impact your bottom line, visit www.ventanaresearch.com.
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