How to analyze your supply chain to increase profitability

Posted: February 3, 2010 11:23 PM

Supply Chain Analysis
Supply Chain Management requires a holistic approach that measures critical points in the process. Supply chain metrics link strategic plans to sources, production, and customer satisfaction. The modern business needs to change the traditional manner of supply chain and logistics management, where functional areas are separated into stove-piped areas of sales, marketing, supply, maintenance, engineering, and logistics, to an integrated process that aligns these functions into related processes to gain efficiency and optimal performance. In 2009, the Institute of Supply Management stated that a 2.5% reduction in procurement costs produces the same amount of profit as a 10% increase in sales.
Organizations can realize the value of strategic supply chain management, the value of metrics for managing the supply chain, and evaluating performance by using a process to develop flexible measurements that enable the supply chain to be tailored to the unique needs of any organization. The process consists of five steps: metric mapping, metric validation, data collection, data and process analysis, and documentation of results and findings (Love).

By undergoing supply chain reengineering, an organization focuses resources to improve all areas of the supply chain, such as “logistics enterprise-customer relations, demand and supply planning, supplier relations, materiel positioning, delivery to the customer and transportation service providers” (Grozinski). According to Grozinski (2004), the results of transformation are the following:
 Better forecasting and requirements determination
 improved end-to-end supply chain distribution
 greater collaboration in the supply chain
 improved automated systems

Management of the supply chain requires key personnel to monitor and evaluate key measurements of performance. Effective supply chain management ensures finished goods are available at the distribution centers, enable reliable and responsive production capabilities, make certain efficient use of production resources, and provide for effective production planning (Juran and Dershin 2000)
A supply chain management strategy is the use of Third Party Logistics Providers (3PL), such as UPS or FedEx, to decrease costs or improve value to the customer by generating operational efficiencies and sharing resources, such as trucks or ships, to move material (Knemeyer and Murphy 2004). The reasons for using this type of service are cost savings, customer satisfaction, flexibility with shipment consolidation, order fulfillment, and flexibility with carrier selection. Effective strategies for 3PL providers are cost and differentiation strategies that gain and maintain competitive advantage, serve the needs of the customer, and reduce costs throughout the supply chain.
Analyzing supply chains consists of a process that extracts and presents information for measurement, monitoring, forecasting, and management (Marabotti 2003). To make this information useful, all parts of the supply chain require visibility, which can be tracked with supply chain analytics that include “production, materials management, procurement, manufacturing, warehousing, transportation, inventory, supplier management, fulfillment, customer relationship management, demand management, order fulfillment, product development and returns management” (Marabotti).
Reasons for Metrics

In the past, most business models centered on financial metrics that did not adequately reflect the activity of a supply chain. A supply chain consists of many different pieces of independent but related parts that need to be optimized in order to attain efficiency (Chan and Qi 2003). Advantages of a process-based performance measurement are the following:
 To provide the opportunity of recognizing the problems in operations and taking corrective action before these problems escalate
 To facilitate linking with the operational strategies, identifying success, and testing the effect of strategies
 To support monitoring the progress
 To assist in direct management attention and resources allocation
 To enhance communication of process objectives and position among the processes involved in the supply chain, thus improving trust and common understanding.

The economic recession forces executives to consider supply-chain performance as a way to improve profitability with sales are flat. Research states companies are unable to improve their performance because they have inadequate metrics for the following reasons (Cook and Hagey):
 Most companies do not optimize their supply-chain performance
 Too many companies are supply-chain introverts
 Incentives are not tied to supply-chain improvements
 Companies believe technology will quickly solve the problems

In contrast, the leading companies in supply chain management, Wal-Mart, Dell Computer, and Toyota, focus on measuring all aspects of the supply chain. As a result, they are twice as efficient and spend less on supply chain expenses.
Milliken (2001) states performance measurement process provides the means for identifying and correcting short falls within the supply chain. Most companies do not know their performance because they have inadequate measures of performance and poor systems of collecting information. Another concern about performance metrics is to identify the most important aspects to be monitored and evaluated (Milliken). Organizations need to employ metrics to identify and develop problems so that solutions can be implemented. Managers need the responsibility of monitoring key metrics and held accountable for performance. Performance measures can be used to identify points of failure in the supply chain for which supply chain partners can be held accountable for their performance (Baiman, Fischer et al. 2001). Overall, the supply chain needs separate modules integrated for optimal performance.

Developing Supply Chains
Five fundamentals make up effective supply chains: one, the correct strategy; two, talented managers; three, effective metrics; four, broad vision; and five, understanding the differences between components of the supply chain (Cook and Hagey 2003). Although each is important, replacing hunches with metrics enables managers to track quantifiable measures with rigorous methodology and quality data. The most successful metrics link operations to customers, suppliers, and logistics providers by monitoring the entire supply chain so that decisions can be made before problems impact customer service. Another critical component of the supply chain is flexibility that allows a company to change as required to reduce cost, improve responsiveness, and fulfill customer requirements.

Standardization enables operational efficiency and flexibility in a global operations, and Six Sigma has become the global standard of systemic methodology for the establishment of process standards (Ramakumar and Cooper 2004). Companies that engage in process standardization are able to manage complex value chains and are 73 percent more profitable than organizations that do not use standards. To implement standardization, the process “must include common definitions of metrics, common language that maintains the integrity of business rules, process logic and data, and flexibility to rapidly change and configure these processes as business challenges evolve” (Ramakumar and Cooper 2004).
Reasons for Supply Chain Metrics
Lambert and Pohlen (2001) state that to accomplish effective supply chain management, metrics need to be aligned across multiple organizations and focused on critical areas that contribute to success. However, many times metrics are not aligned properly or fail to measure appropriate performance, so the supply chain is inefficient, organizations miss opportunities, or conflict develops between supply chain members (Lambert and Pohlen). Many times, managers focus on evaluating internal performance with financial metrics that do not accurately portray supply chain efficiency. Financial metrics such as inventory turns and carrying costs measure the impact of poor supply chain practices but do not reflect how the supply chain is supporting the requirements of the customer.

Effective supply chain metrics are needed for several reasons as the global market continues to evolve and management requires new types of information to synchronize operations (Lambert and Pohlen 2001). Currently performance metrics are directed toward internal performance and do not span across the entire supply chain; therefore, metrics need to monitor performance from a supply chain perspective. Supply chain metrics measure inter-performance, as well as intra-performance between business units and corporations. The complexity of this task involves aligning separate and independent operations and assigns accountability for the performance of the supply chain, not necessarily the performance of one part of the chain. Standard supply chain metrics enable performance tracking with a few key indicators and allocation of resources as needs shift. The ultimate goal of supply chain metrics is to create a cooperative effort across functional areas and across companies to enable a seamless effort to support business objectives.

Results of supply chain analytics are a return on investment of 40 percent by lowering costs, improving productivity, and increasing opportunities (Marabotti 2003). Another benefit of metrics is the use of simulation, which can enable an organization to predict the future based on past performance, so cause and effect needs to be determined for inputs and outputs (Kleijnen and Smits 2003). Metrics should focus on the customer throughout the supply chain in order to attain maximum efficiency and effectiveness, not the perception of the company (Chan 2005). Recent trends in the global economy have forced business to turn a critical eye on their internal processes to find value in the demand and supply chains with customer-centric strategies. Although data may be collected, it requires analysis and usable presentation to be useful to managers.

How to Determine Supply Chain Metrics
The supply chain determines which variables are required to evaluate the metrics because each system is unique (Kleijnen and Smits 2003). When a market is a buyers’ market, the customer metric is important, and a hostile environment with stiff competition should monitor internal operations metric (Kleijnen and Smits). Finally, if supply metrics improve, then the financial metrics will improve. In order to ensure cooperation along the supply chain and within the organization, information needs to be shared with all stakeholders, all business units, and all companies in the supply chain. In addition to sharing information, a common understanding of definitions and meanings is required to standardize the process.
By creating metrics, performance can be evaluated based on objective measures, instead of subjective opinions (Silver 2004). Objective measures expose vulnerabilities and allow managers to make effective decisions to strengthen the exposed areas. Silver (2004) states that effective metrics drive efficiency, improve processes, increase customer and employee satisfaction, and increase shareholder value. In order to determine the best metrics for the supply chain, customers and service providers need to ask the following questions:
 What is important?
 How is performance measured?
 What key performance indicators exist?
 What is the desired result?
In addition to establishing effective measurements, metrics need to be reviewed on a regular basis to identify problems and generate action plans for correction.

Using the model of 3PL, performance is based on the relationships between trust, communication, opportunistic behavior, reputation, satisfactory prior interactions, and relationship-specific investments (Knemeyer and Murphy 2004). Trust is the foundation of the model, which the five other factors influence. Trust is defined as certainty based on experience, so in regards to 3PL, trust is the customer’s perception that the service provider will fulfill its commitments. Communication occurs when information is shared between parties in a timely and meaningful manner (Knemeyer and Murphy). Opportunistic behavior is when a person acts in a deceitful manner to violate previous agreements, which means a service provide would take advantage of a customer while appearing to be righteous. Reputation is the known characteristics of a person or organization, which ties directly into the number of prior interactions with satisfactory results. Relationship-specific investments are irrevocable resources directed toward the relationship, such as the construction of warehouse space or commitment of technology for communication.

To obtain collaboration across the supply chain, metrics need to be designed to measure performance as well as demonstrate financial gain in order to resolve conflicting views about where to allocate resources (Lambert and Pohlen 2001). Supply chain metrics need to support the business strategy, as well as the strategy needs to provide guidance as to what metrics need to be measured and monitored. When metrics align with strategy, managers identify where to change in order to accomplish corporate goals. A balance scorecard should be utilized to analyze different dimensions of performance metrics with each metric using five to six key control variables, or sub-metrics, to develop a score (Kleijnen and Smits 2003).

Lambert and Pohlen provide a seven-step process to establish supply chain metrics and align them throughout the supply chain across functional areas and separate firms:
1. End-to-End mapping of the supply chain with key points identified.
2. Analyze each link and evaluate the potential value.
3. Develop financial metrics to assess the relationship on profitability and shareholder value of the two firms.
4. Synchronize processes and activities to achieve performance objectives.
5. Use non-financial performance measures to enable individuals to meet supply chain process objectives and financial goals.
6. Evaluate shareholder value and market capitalization across firms with supply chain objectives and revise measures as required.
7. Copy successful processes throughout the supply chain.

Metrics in Supply Chain Management
Literature reveals different dimensions that separate groups of metrics, which are measured through different variables. Knemeyer and Murphy (2004) list primary dimensions used to determine the effectiveness of 3PL provider are reduced logistics costs, increase customer support, reduced cycle times, and improved logistics responsiveness. Gunasekaran et al. (2001) believe procuring orders, supply chain partner performance, production, delivery, and customer satisfaction are important metrics. Another set of possible dimensions for supply chain performance are inventory visibility, predictable production, and forecasting demand (Juran and Dershin 2000).

Based on the dimensions of evaluating supply chain performance, metrics need to be created and adapted for management. For example, some organizations evaluate reliability as delivery of the correct product, to the correct place, at the correct time, in the correct condition and packaging, in the correct quantity, with the correct documentation, to the correct customer. In order to evaluate this area, the following metrics are used: quality order fulfillment, order delivered complete, and order delivered by agreed upon date (Love). Kleijnen and Smits (2003) consider a different set of metrics key for an effective supply chain: fill rate, confirmed fill rate, response delay, stock (work in progress), and delay. Other possible metrics include cost, time, capacity, capability, effectiveness, reliability, availability, flexibility, productivity, utilization, and outcome (Chan and Qi 2003). The large variety of metrics listed above demonstrates the many different measures used to evaluate supply chains, and the need for analysis to determine which metrics are appropriate to optimize performance, increase efficiency, reduce costs, and improve profitability.

Conclusion
When sales are down and costs are rising, supply chain management enables an organization to maximize resource utilization and cash optimization. In summary, reflect on the following when considering supply chain optimization:
 A 2.5% reduction in procurement costs produces the same amount of profit as a 10% increase in sales.
 A supply chain consists of many different pieces of independent but related parts that need to be optimized in order to attain efficiency [6].
 The leading companies in supply chain management, Wal-Mart, Dell Computer, and Toyota, focus on measuring all aspects of the supply chain.
 Companies engaged in process standardization are able to manage complex value chains and are 73 percent more profitable than organizations that do not use standards.
 Organizations need to employ metrics to identify and develop problems so that solutions can be implemented.
 Results of supply chain analytics are a return on investment of 40 percent by lowering costs, improving productivity, and increasing opportunities [5].
 By creating metrics, performance can be evaluated based on objective measures, instead of subjective opinions [14].
 When metrics align with strategy, managers identify where to change in order to accomplish corporate goals.

Dr. Randall M. Mauldin, CPSM®, PMP®
Supply Chain Analysis 6
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How to analyze your supply chain to increase profitability

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