Supply Chain Benchmarking – an endlessly debatable topic. I wanted to share with you one way I like to use benchmarking, which is to frame a conversation with Supply Chain executive leadership around direction and distance of performance change required. My first pass at benchmarking years ago was for the CIO of HP, around IT cost as a percentage of revenue, to gauge whether IT budgets were in line with industry peers. We used one of the big-five consultancies, and 3 months and $400K later, we had the numbers, and had a great view of, by each tech market we were in, what level of tech spend was appropriate, and where budget changes may be mandated. I found the process very subjective, which it was, but valuable in the sense that it provided “bracketing” or bounding for what we should expect to set strategically. Continue reading
In my years as Research Director at SCC it was pointed out many times to me that we (accidentally?) omitted “one of the most important metrics in supply chain: Forecast Accuracy”. Many people believe this “It’s all about forecast accuracy” to be true. In practice it is not however.
I agree that garbage-in, garbage-out does apply to S&OP just like every other process. Continue reading
Some time ago I reviewed the KPIs of a group of clients, and what was fascinating was the range of time it took for them to gather only the most essential data – Perfect Order Reliability (OTIF), Order Cycle Time (OCT), Upside Flexibility (Lead Time), Total Supply Chain Cost to Serve (TSCCS), and Cash-to-Cash cycle time (C2C). One team took an hour to get the metrics, even to the detail of segmentation by major supply chains, and so on – it was more time to fill in a form than it was to gather the data (that’s telling you a little bit about form design too). They used standard metrics as part of their overall day-to-day supply chain management, and the infrastructure to report was real-time – for all metrics. Another team took a day. Continue reading
At a recent training I was asked the question whether the Supply Chain Cost metric applies to a return operations.
“We receive consumer goods from retailers and .com customers and inspect these goods and then determine disposition; some products we repack, some we repair, some we scrap and the rest we return to the OEM.”
It sounded to me like a typical return supply chain. You have costs to operate these facilities, staff and materials used, right? All these are part of Total Cost to Serve.
“Yes, but we never own the materials. They belong to our customer, we are just the service provider, why should we report the cost of goods? Similarly, as we never own the materials why would we care about inventory in asset management?”
Ah, the question behind the question. A service supply chain may manage goods but not own them.
To address the question about the Total Cost to Serve calculation first: Yes, the cost to acquire materials is part of Supply Chain Costs. And this is accurate even for the service supply chain above. The cost for packaging materials acquired (sourced) for the repacking for example should be included in the Supply Chain Costs calculation. (That is assuming you acquire them and not your customer). But the cost of the returned good is not yours, which matches financial transactions as you do not buy the returned goods from your customer.
By the way, there are costs in Supply Chain Costs that may be zero or near zero in a traditional* supply chain. Disposition costs would be low for such a supply chain, unless the (Make) process has significant waste for example. Total Cost to Serve has a place holder for all relevant costs, the way the supply chain operates determines how much each a level-2 or a level-3 metric contributes to the level-1 metric.
The real question here though is whether all metrics at all levels apply to every supply chain. In my experience: Yes for level-1 metrics, not always for level-2 and level-3 metrics.
Level-1 metrics capture multiple indicators over the complete supply chain. For example Cash Conversion Cycle (‘CCC’) – Even if you do not have inventory you still buy and sell services. You need to pay your suppliers and collect from your customers. CCC is still relevant as it tells you how many days of business you need to float (to float = borrow money to pay your suppliers until you receive from your customers).
At level-2 and level-3 some metrics may not be needed as I may not have inventory to report. One could argue though that if you report material costs associated with the repacking process there will likely also be inventory to report. But service supply chains can be without any traditional inventory, in which case those metrics can report zero.
And then there is of course the zero inventory supply chain..
..taking ownership of the sourced goods at the same moment ownership transfers to the customer.. Perfectly free of inventory, or is it? Think about it.
Recently I received questions from multiple people about the inventory days of supply metric. This metric has been part of SCOR since — I guess — the beginning, but some of our practitioners/trainees confuse the days for lead-time.
Question: If I have 5 days worth of inventory does this mean it would take five days to get to zero inventory (assuming I do not buy or make more?)
Answer: No. In the ideal world, IF you have the right mix of goods, materials, lead times and capacity the answer would be yes, but the realities of mix issues, inventory aging and lead times will mean that it takes substantially longer to deplete all inventory.
Question: If I have 5 days worth of inventory in WIP does this mean that it takes five days to make the product?
Answer: No, there is no correlation between Make lead-time and inventory days of supply in WIP. For example: if it takes 10 days to make the product but I book the raw material issuance, consumption and the finished goods increase all at the same time, then I would not report any material in WIP – this is known as backflush costing. But even environments where materials are issued pre-production, materials may remain in WIP well beyond the typical duration of the physical make process. For example: material rejected for quality reasons that may remain in WIP until the material is reworked. Or consider the impact of creating sub-assemblies as part of a postponement strategy.
Question: Does 5 days inventory days of supply mean I have 5 inventory turns per day?
Answer: No. Inventory turns is like the multiplicative inverse of inventory days of supply. If inventory days of supply is 5 days the your will have 365/5 = 73 turns per year (or 1/5 turns per day).
So why do we use this days of supply to express inventory? Two reasons. First because inventory is part of the bigger cash-to-cash cycle time which is expressed in days. And secondly because an absolute inventory number does not tell the whole story. I always ask the training attendees: I have 2 gallons of milk in the fridge — is that a lot or not? The answer is: it depends. If I use it only to cream my daily cup of coffee; it will last me well beyond the expiry date. If however you have a couple of teenage kids, it may last less than a week.
This blog entry was originally published by the author on the now demised SCC website.
Over the past two weeks I have had the pleasure of meeting with senior executives from a variety of companies in training situations where we could talk freely and discover opportunities within their businesses for improving their supply chains. SCC trainings—particularly in-house private trainings – take a practical, hands-on focus to supply chain improvement. Managers frequently leave the trainings with specific ideas and improvement programs laid out and ready to go. Continue reading
Many years ago (September, 1994) I read an Scientific American article “Software’s Chronic Crisis” with interest – my job at the time being precisely “Software Development”. The article introduced me to “CMM” (Capability Maturity Model) in software development, as an aid to improving software to avoid the inevitable ‘crisis’. “Maturity” here didn’t connote age (there are certainly very old IT organizations I’ve worked in I would hardly call ‘mature’) but rather ‘well developed’. Continue reading
As a trainer and advocate of standard process languages and standards for metrics I frequently talk to companies that don’t do classic manufacturing; services providers like banks, insurance companies, software companies, etc. Their observation is that they like the value of the standard reference models (SCOR¹, CCOR and DCOR) but they are too manufacturing oriented: “We buy and sell DIY hardware and tools, we don’t make them” and “we provide banking services, we don’t make or ship money”. The question I would like to address here is whether standard reference models can be deployed in non-manufacturing companies.
It was Abraham Maslow who said that when you have a hammer, you treat everything like a nail. My hammer is the SCOR language which I normally use to describe supply chain processes. With this hammer in hand I find that many processes appear to be some form of supply chain process. An organization or function performs supply chain processes if it delivers some type of goods or services. The problem I found is that the language may not match. Let’s take IT as an example. Continue reading