A Guide To Supply Chain Performance Management - InformationWeek

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A Guide To Supply Chain Performance Management

Here a guide to performance management metrics will help your organization act in pursuit of supply chain objectives.

Measuring the performance of a supply chain isn't easy. For one thing, supply chains are subject to conflicting requirements, creating confusion about which aspects of performance ought to be monitored and improved. For another, there are dozens of metrics to choose from, and it's far from obvious how to select among them. A further source of trouble — one that remains largely unrecognized — is that the common practice of reducing all measurements to simple averages fails to convey an adequate picture of supply chain performance.

Solving these problems is difficult but not impossible. This article describes a solution based on three simple steps: Align measures with objectives, choose the most informative metrics, and analyze variability along with averages.

Measurement and Objectives

When it comes to supply chains, organizations rarely suffer from a shortage of objectives. In fact, the more common problem is too many objectives and no way to achieve them all. Would you like to reduce the cost of supply chain operations? Accelerate the flow of goods through the chain? Increase flexibility to meet changing demand? Reduce inventory levels? Improve on-time deliveries? Increase your fill rates? Few managers find themselves able to say "no" to any of these objectives, but inherent trade-offs exist among them that can't be avoided. Understanding these trade-offs and striking the right balance among them is the essence of supply chain strategy.

As Marshall Fisher explained in his classic Harvard Business Review article,1 the most fundamental trade-off in a supply chain is between efficiency and flexibility. A highly efficient chain necessarily uses its capacity to the utmost, minimizes inventory at each location, and streamlines operations to achieve economies of scale at every link. By contrast, a flexible chain must maintain reserve capacity and inventory to respond quickly to unanticipated demand; it must be able to produce and deliver products in varying quantities with short lead times. Such requirements inevitably compromise efficiency.

The choice between efficiency and flexibility isn't all or none. Rather, it's a matter of degree, with each company finding its own best balance between these conflicting goals. As shown in Figure 1, that balance is determined in large part by positioning the company within its market and the nature of the products it sells. A company that competes primarily on price has little choice but to sacrifice flexibility in search of efficiency, while a company that differentiates itself on quality of service must usually have a very flexible chain. Companies that differentiate based on product can go either way, depending on the nature of the product. Innovative products require flexible chains to handle uncertain demand, while mature products call for efficient chains to hold down costs.

FIGURE 1 The basic supply chain trade-off.

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