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DevelopingAnOverviewofSupplyChainPerformanceMetricsProcess,RecommendationsMcKinsey
ThisdocumentgivesanoverviewofthedifferentmetricsthatcanbeusedtomeasuresupplychainperformanceTheSupplyChainCoE’sobjectiveistodefineabenchmarkingframeworkcapableof:Comparinggenericmetricperformancesforuseonprojects.Capturingfurtherbenchmarkingdatainaconsistentformat.TheLondonShop’stask:Developanoverviewofthedifferentmetricstomeasuresupplychainperformance.Selectthemostimportantmetricsthatcanbeusedacrossindustries.Discusshowthemostimportantmetricslinkotheroperationalmetricswithineachstageofthesupplychain.SuggesthowthesupplychainCoEshouldcontinueconcerningthistopic.
WeusedinformationfromseveralsourcesduringourprojectInternalandexternaldocuments:Highlevelbenchmarkingframeworkforsupplychainperformance(H.Cook):ShopStudy(March1997)accessinginformationfromavailableexpertsandpastprojects.Supplychainbenchmarksandbestpractice(DowPolyurethane&EpoxyApril1995).SupplyChainBenchmarkAssessment(March1997).Supplychainappraisalandbenchmarks:(clientXSeptember1997).DiscussionswithsupplychainCoE:GrahamColclough.AndrewMorgan.LeeSherman.DeborahHuff(CapMcKinsey).
Possibledatasources
PerformancemeasurementisanimportantbutcomplexsubjectThisdocument’saninitialstepintherightdirection.Companiesseetheneedformetrics......butdevelopingthe“right”setofmetricsisachallenge“Ifyoucan’tmeasure,youcan’tmanage,youcan’tmotivate”EstablishingthepropermeasureswithinanorganisationenhancescontinuousNocommonlyused“model”.Businessissuesthatwarrantperformancemeasurement:Differbetweenindustries.Differwithinindustry.Changeovertime.Thereisnoone“right”answerFocusAccountabilityCommunicationLinkingstrategytoactionAssigningaccountabilitytotakeactionwhenneededMeasuringprogresstowardsgoalsthroughinteractivecommunicationandeducation
Weusedagenericsupplychainframeworkasabasisforouranalysis...SupplyChainFrameworkSuppliersPurchasingInformationFlowForecasting&ProductionPlanningCustomerServiceInventoryManagementInboundLogisticsManufacturingMaintenanceMarketing&SalesOutboundLogisticsIntegratedSupplyChainManagementCustomersThisframeworkalignswiththeCoEPOVandisalsosimilartoframeworkforthesupplychaindiagnosticsinventorydatabase.
...andconcludedtherearethreestrategicobjectivesweshouldfocusonwhenanalysingthesupplychainKeymetricsmustgiveinformationonhowacompanyisperformingagainstoldstrategicobjectives.Strategicobjectives:QualityTimeCostProducts/servicesaccordingtocustomerexpectationsOnagreedtimeAtreasonablecostPurchasingInformationFlowForecasting&ProductionPlanningInventoryManagementInboundLogisticsManufacturingMaintenanceMarketing&SalesOutboundLogisticsIntegratedSupplyChainManagementCustomerServiceSupplyChainFrameworkNB:BoundariesNPDISupportfunctionsTailortocompanyspecific(BSC)objectives
Webeganwithabrainstormingsessiononthekeydriversforquality,timeandcostThecompletepicturecanbefoundintheappendix.Welookedatthesupplychainfromthecustomer’sperspective.Webrainstormedon“whatcouldgowrongalongthesupplychain”:Whataredriversofperformancefromaquality,timeandcostpointofview.PriceServiceProductqualityProductquantityProductdeliveryLatearrivalLatedeliveryInventorycostProductcostProduc-tioncostDeliverycostCustomerservicecostQualityTimeCost
MakingtheirclientspecificwarrantsattentionRespectallsourcesofdata:Understandtheirrelationships—the“causaltree”:RecognisedCross-Industry;In-IndustryandIn-Companysimilaritiesanddifferences.Blind-sidedIntuitionOpinionDiscussionSurveyFunctionalMeasuresKPIsExternalBestPracticeQualitativeQuantitativeObjective1KPIKPIKPIKPIObjective2KPIandxxxmeasure“Dualservice”measures(cost&time)“Hardwired”andtennonsPush-pull
Makingtheirclientspecificwarrantsattention(cont.)RecogniseCross-Industry;In-Industry;andIn-Companysimilaritiesanddifferences.Interfacethesolutiontothecurrentclients’measures,systems,processesandculture:...andguidemigrationovertime.Ensureaccountabilityforcollectingandactioningisclear.
ProposedSupplyChainKPIsKPI’shelptoidentify“where”theperformanceproblemiswithinthesupplychain,andsteertowardsareastoexplore“why”.Accuracy(as%ofsales)Customersatisfaction%ofsatisfiedcustomersTotalcycletimeTime(forcustomer)fromplacingordertoreceivinggoods%ofproductsdeliveredontimeTotalsupplychaincostas%ofsalesCostperproductsoldas%ofsalesCostas%ofsales%ofproductsdeliveredaccordingtocustomerorder(quantity/quality)%ofcustomerssatisfiedwithservice%ofproductsorderedalreadyinstockDefectrateofproductsas%ofproduction%ofgoodsdeliveredaccordingtoorder(quantity/quality)bysupplierTimefromorderplacementtoreceptionofgoodsTimefromproductionordertodeliveryintofinishedproductwarehouseDowntimeas%oftotalproductiontime%ofgoodsdeliveredontimebysupplierCostas%ofsalesCostas%ofsalesCostas%ofsalesNumberofstockturns/yearsTotalSupplyChainForecastingPurchasingInboundLogisticsManufacturingMaintenanceInventoryManagementMarketing&SalesCustomerServiceOutboundLogisticsQualityTimeCost%ofactivesuppliersthataccountfor90%oftotalpurchasevalueNeedtoidentifyM&SKPIsBEWAREofinter-relationships
EachstageofthesupplychainhasavarietyofmetricstomonitoroperationaleffectivenessThesemetricshelpidentify“why”thereisaperformanceproblem.ForecastingPurchasingInboundLogisticsManufacturingMaintenanceQualityTimeCostActualvs.forecastedsales%ofdatawhichcanbeusedwithoutmodificationintheplanningprocess%ofallactivesuppliersthataccountfor90%oftotalpurchasevalue%ofcorrectordersplaced#ofalternativesourcesofsupply#ofsuppliersinvolvedinproductdevelopment/innovation#ofsuppliersperpurchasingemployee(purchasingprofessional)#ofvendorsproductsorderedPurchasingheadcountas%oftotalheadcount%ofgoodsdeliveredaccordingtoorder(quantify/quality)bysupplier#ofcarrieralliances#ofovershipments%ofdirectmaterialpurchasesthatarenotinspectedatincomingqualityassurance,goingfromstocktodock%ofdirectmaterialpurchasesthatarenotinspectedatincomingqualityassurance,goingfromstocktoproduction%ofordersdeliveredwithoutunplannedcommunicationorspecialattentionDefectrateofproductsas%ofproductionScraprateas%ofproduction#ofchangesperproductionperiod%ofgoodsrepackagedActualvs.productioncapacityTimefromorderplacementtoreceptionofgoodsTimefromproductionordertodeliverintofinishedproductwarehouse%ofaccountspayablehandledbeforeduedate%ofaccountspayablehandedin1–30days%ofaccountspayablehandledin31–60days%ofaccountspayablehandledin61–90days%ofaccountspayablehandledinover90days%ofsuppliersconnectedviaEDIAverageactualtimetodeveloped/negotiateacontract%ofgoodsdeliveredontimebysupplierProportionofsupplierswhodeliverdailyProportionofsupplierswhodeliverfrequentlythanmonthlyProportionofsupplierswhodelivermonthlyProportionofsupplierswhodelivertwiceweeklyResponsetimetoschedulechangesResponsetimetounforeseenproblemsTurnaroundtimeonrejecteditemsAverageproductionleadtimeCurrentmanufacturingleadtimeMinimumproductionleadtimeDowntimeas%oftotalproductiontimeDowntimeduetopartsshortage(orstockoutsingeneral)HoursofunplanneddowntimeCostas%ofsalesCostas%ofsalesCostas%oftotalcostsCostoforderspurchased(rangeCostofvendortransactions(range)CostofexpediterepairmaterialsPurchasingspendpersupplierPurchasingspendperpurchasingemployee(purchasingprofessional)Costas%ofsalesCostas%oftotalsalesCostas%ofsalesCostpersaleableunitCostperunitproducedCostas%ofsalesCostperunitproducedSource:H.CookNosofstrategies,or“uptime”service-basedcontracts
InadditiontotheKPIseachstageofthesupplychainhasavarietyofmetricstomonitoroperationaleffectiveness(cont.)InventoryManagementMarketingandSalesCustomerServiceOutboundLogisticsTotalSupplyChainQualityTimeCost%ofproductsorderedalreadyinstockDefectrateofproductsas%ofproductsleavingwarehouseAccuracyofinventoryrecordsInventoryvs.servicelevelItemsininventoryas%oftotalunitpurchasesObsoletevs.activeinventory%ofcorrectorderstaken#ofadditionalsalesfromcustomerreferrals#oforderchangesas%ofordersfilled%ofordershandledwithcommitmenttoproduct/servicedeliveryonfirstcall%ofcustomerssatisfiedwithservice# ofcomplaintsas%oftotalorders#ofphonecallstocustomerservicedevelopmentperordershipped#ofcomplaintsduetoOn-timedelivery;OrderEntry;Packaging;Productquality;ShippingError#ofcomplaintsas%oftotalorders#ofcustomercontactsperorder# ofenquiries(includingcomplaints)thatwerenotansweredtothecustomerssatisfaction#ofinformationrequestsas%ofcustomerorders%ofcallsabandoned,answeredbyrecording,delayed%ofcustomercontactthroughcustomerservice%ofcustomerfollow-uphandledbyCustomerServiceRepresentative;DepartmentManager;FieldRepresentative;ResponsibleManager%ofinvoicescontainingerrors%ofordersdeliveredcompleteandwithouterror(orderfillrate)%ofordersthataredamagedonarrivalatcustomersite%ofrespondentsthatcanhandlecomplaintswithouthandingofftootherperson/dept.Average%ofdisputedinvoices%ofproductsdeliveredaccordingtocustomerorder(quantity/quality)Degreeofutilisationoffacilities(%)Equipmentutilisation—loadEquipmentutilisation—weightTimefromorderplacementtostartofdeliveryCustomersatisfaction(rating)%ofsatisfiedcustomers%ofinformationoncredithistorylimitavailableOn-line%ofinformationonopen-orderhistoryavailableOn-line%ofinformationonoutstandingbalanceavailableOn-line%ofinformationonpricingavailableOn-line%ofinformationonproducthistoryavailableOn-line%ofinformationonproductIDcodeavailableOn-line%ofinformationonshippingpointsavailableOn-lineRatioofoperationslabouras%ofpassivelabourAverage#ofordersrejectedAverageproducttimeinwarehouseNo.ofdaysconsumptioninstock(A-goods)No.ofdaysconsumptioninstock(B-goods)No.ofdaysconsumptioninstock(C-goods)No.ofdayssafetystock(A-goods)No.ofdayssafetystock(B-goods)No.ofdayssafetystock(C-goods)No.ofproductswithduplicationstockPlanneddaysofinventoryonhand%ofaccountsreceivablesettledbeforeduedate%ofaccountsreceivablesettledin1–30days%ofaccountsreceivablesettledin31–60days%ofaccountsreceivablesettledin91days%ofaccountsreceivablesettledin61–90daysDeliverytime%ofproductsdeliveredearly#ofdeliveriespermanhour%ofordersdeliveredontime(asdefinedbycustomer)%ofordersdeliveredwithanaveragedelayof1monthAverage#ofdaysdelayafterscheduledshipdateTotalcycletimeTime(forcustomers)fromplacingordertoreceivinggoods%ofproductsdeliveredontimeAveragecustomerquotedleadtimeAverageleadtimefromreceiptofordertoshipmentAveragetimetakentoaccessinformationCashtocashcycleLongestcustomerquotedleadtimeNewproductintroductiontimeProductchangeovertimeShortestcustomerquotedtimeTimefromreceiptofordertoreceiptofshipmentbycustomerTimetakentorectifyincorrectordamagedordersAveragetimetakentorespondtorequestsCostas%ofsales#ofstockturns/yearCostas%ofcostofgoodspurchasedCarriedworthofexpiredlotsA-goodsasapercentofinventoryAveragestocklevelB-goodsasapercentofinventoryC-goodsasapercentofinventoryInventorycostas%oftotalassets(grossassets)MaximumstocklevelMinimumstocklevelCostas%ofsalesCostas%ofsalesCostperdelivery#ofroutemilesperdelivery#ofwarehousingfacilities#ofwarehousingoflocations%oftransportationunitsownedbycompanyCostperorderCostperrouteTotalsupplychaincostas%ofsalesCostperproductsoldas%ofsales%ofprofitfrombasepurchase%ofprofitfromincreasedpurchases%ofprofitfrompremiumpricing%ofrevenuegeneratedbylargestcustomergroup(top20%)Costperproductsoldas%ofsalesOperatingprofitpercustomeras%ofoperatingcostspercustomerTotalcostperorderTotalcostperunitproducedCostas%ofsalesSource:H.Cook
Giventhemultitudeofmetricswesuggesttoanalysesupplychainperformanceusingahierarchyofmeasures...diggingthroughthecausaltreetoimprovebusinessperformance.KeyKPISupportingMetricsOtherOperationalMeasuresTypeofMeasureExampleHighestLevelUseWhoUsesItForecastingaccuracy(as%ofsales)IntegratedsupplychainGenericbenchmarkingConsultantTopmanagementSupplychainstagemanager%ofsuppliersconnectedviaEDISupplychainstagediagnosticConsultantSupplychainstagemanagerA-goodsasa%ofinventorySupplychainstagediagnosticSupplychainstagemanagerObjectiveFind“where”theproblemiswithinthesupplychainIdentifythe“why”withinthesupplychainstageGivemorein-depthinformationaboutsupplychainstage
Forexample,thequalityofcustomerserviceperformancecanbeclearlymeasuredatthreedifferentlevelsQualityKeyKPI’sSuggestedSupportingMetricsOtherOperationalMeasures%ofcustomerssatisfiedwithservice#ofcomplaintsas%oftotalorders#ofphonecallstocustomerservicedepartmentperordershipped#ofcomplaintsdueto:orderentry,packaging,shippingerror,...)%ofcallsabandoned,answeredbyrecording,delayed,...%ofcomplaintshandledby:customerservicerep.,departmentmanager,...KPI’swillbemeasuredforgenericbenchmarks,whilstoperationalmetricswillbemeasuredbyacustomerservicemanager....#ofcomplaintsthatwerenotansweredtocustomersatisfactionAveragenumberofordersrejected
KeyKPI’sSuggestedSupportingMetricsOtherOperationalMeasuresOutboundlogisticsperformance...%ofproductsdeliveredaccordingtocustomerorder(quantity/quality)(Thesecanoftenbedrivenbycustomerservicemetrics)Degreeofutilisationoffacilities(%)Equipmentutilisation(load/weight)Deliverytime%ofordersdeliveredontime(asdefinedbycustomer)#ofdeliveries/manhour%ofordersdeliveredearly%ofordersdeliveredwithanaveragedelayof1monthAveragenumberofdaysofdelayafterscheduledshipdateCostas%ofsales#ofroutemilesperdelivery#ofwarehousingfacilities/locations%oftransportationunitsownedbycompany...CostperdeliveryCostperorderCostperrouteQualityTimeCost
KeyKPI’sSuggestedSupportingMetricsOtherOperationalMeasuresQualityTimeCostFormaintenance,commonlyusedsupplychainperformancemetricsrelatetotimeandcostThequalityofmaintenanceiscommonlymeasuredbylagmeasuresintermsofcostorasaproductionmeasure(downtime).Wesuggesttheuseoftwoleadmeasuresthatproactivelymonitormaintenanceperformance....NumberofservicecontractNumberoftrainingdaysformaintenancestaffDowntimeas%oftotalproductiontimeCostas%ofsalesCostperunitproducedDowntimeduetopartsshortage(orstockoutsingeneral)Hoursofunplanneddowntime
Justremember...Alargenumberofmetricsexist,sobeselective.Astepbystepapproachtomeasuringsupplychainperformanceshouldbeundertakeninordertoavoidbeingoverwhelmedbydata.Thefollowingsegmentationgivesussuchanapproach:23keyKPI’sallowustoidentify“where”theproblems”existwithinthesupplychain.Keysupportingmetricsthenallowustoanswer“why”theproblemsexist.Operationalmetricsallowustogoanalysethesupplychainstageinmoredetail.The“right”setofmetricsdoesnotexistforagivenindustryorevenaspecificcompany.The“right”setofmetricsisdynamiclikethebusinessitmeasuresandwillchangewiththetypeofindustry/problemandovertime....
NextStepsfortheSupplyChainCoEAgreeonhowyouwillgoforwardafterthisproject.Agreeonobjectives,scopeandaccountabilities.Eg.DiscussifeachGMTneedsitsownsupplychainmetrics.Furtherpopulatethesupplychainbenchmarkingframework.SeeexampleforPurchasing.Championing(S.Beck/Disc.Heads)....androll-out.Continuousimprovementprocess.
AppendixKPIDefinitions.CausalTrees:QualityTimeCost
PurchasingData:KPIs&Benchmarksa:CAPSResearch:ChemicalPurchasingBenchmark1997;H.Cookshopresearch.IndustrySectorBenchmarkingRange/BestPractice(Validatesource)AverageManufacturing(Validatesource)ChemicalsBestPractice(Validatesource)GlobalChemicalPurchasinga0.06%–3.0%0.30%MeasureQUALITYTIMECOSTAutomotive(Global)aPharma.(Global)aEng./Constr.(Global)a%ofcorrectordersplaced#ofalternativesourcesofsupply#ofsuppliersinvolvedinproductdevelopment/innovation#ofactivesuppliersperpurchasingprofessional#ofvendorsproductsordered%ofallactivesuppliersthataccountfor90%oftotalpurchasevalue%ofpurchaseshandledbypurchasingdepartmentPurchasingheadcountas%oftotalheadcount%purchaseshandledbypurchasingfunction%spendonlong-termbasis(>2yrs)%firmsusingconsortiumbuyingTrainingperpurchasingprofessional%ofaccountspayablehandledbeforeduedate%ofaccountspayablehandedin1–30days%ofaccountspayablehandledin31–60days%ofaccountspayablehandledin61–90days%ofaccountspayablehandledinover90days%ofsuppliersconnectedviaEDIAverageactualtimetodeveloped/negotiateacontract%goodsdeliveredontimebysupplierTimefromorderplacementtoreceiptofgoodsCostas%ofsalesCostas%oftotalcostsCostoforderspurchased(rangeCostofvendortransactions(range)CostofexpediterepairmaterialsPurchasingspendpersupplierPurchasingspendperpurchasingPurchaseDept.expense(¢per$sales)65%29%4%1%1%9weeks59%$24.8m31/100¢18cos£12bn2–26weeks50%42%6%1%1%61%26.515/100¢!0cos$23bn50–8720%1–10%6–1829–2675–75%0.3%–4.5%1657.9%(18%xxx)821.4%82%50%22261%97%2720.4%27%26%42hrs30215.5%11%79%33%1%19%2610/100¢19cos$3.5bn459/100¢
ServiceProductDeliveryWrongInfo.HigherPricesThanCompetitorsHigherMarginThanCompetitorsBadlySetCustomerExpectationsWrongOrderInformationUnabletoMeetCustomerDemandProducedFaultyGoodsProductsDamagedAfterMfgPriceProductQuantityProductQualityDeliveredFaultyGoodsQuality
DidNotHavetheRightMaterialsForecastsIncorrectInformationFailureHumanFailureTechnicalFailureLateArrivalLateDepartureLateArrivalInformationFailureInfrastructureFailureProductFailureWrongInformationInfo.SenttoWrongPersonInformationSentLateProductNotinStockFaultyProductHumanFailureTechnicalFailureUn-controllableFactorsInformationFailureInfrastructureFailureHumanFailureDidNotProduceAnymoreDidNotProduceEnoughInformationSystemFailureTechnicalFailureHumanFailureCouldNotProduceToCapacityTotalCapacityTooSmallOtherProductionPrioritiesMaterialsNotDeliveredWrongMaterialsDeliveredMaterialsDeliveredLateSuppliersForgotWeDidNotOrderSuppliersGotOrderWrongWeGotOrderWrongSuppliersDeliveredLateWeOrderedLateTime
PurchasingCostCustomerServiceCostInventoryCostDeliveryCostProductionCostTooMuchStockWrongTypeofProductsObsoleteStockInfrastructureStockHumanResourcesCostsUsedMoreExpensiveMaterialsMaterialsArrivedLateHumanFailureTechnicalFailureHumanResourceCostMaintenanceCostComplaintsWastagePlanningUsedMoreRawMaterialsHigherCostThanCompetitorOrderedLateDifferentMaterialsPeopleSystemsSameSuppliersWorseDealDifferentSuppliersSkillsProductMOTPromotionSalesVolumesLowerDon’tKnowHowtoNegotiateManySuppliersCost
DefinitionsfortheSupplyChainKPIsForecasting:Accuracy(as%ofsales).Purchasing:%activesuppliersfor90%spend.Timefromorderplacementtoreceipt.%ofgoodsdeliveredontime.Costas%sales.InboundLogistics:%ofgooddeliveredaccordingtoorder(quantity/quality)bysupplier.Timefromorderplacementtoreceptionofgoods.%ofgoodsdeliveredontimebysupplier.
BackUpPanels
DriversandKPIsarehoweverlinkedthroughoutthesupplychainTheyforma“causaltree”alongthesupplychainwhichvariesbetweenindustriesandovertimeTheydonotsimplydriveandexplainjustquality,timeorcost,theymaydriveorexplainallthreeWehavesimplifiedthetreeinthispresentation:WehaveleftoutthelinksandkeptthemodelonagenericlevelWehavenotdevelopeda“perfect”modelFunction/ProcessStageQualityTimeCost
TheseoperationalmetricsshouldbeusedwithcareIdeallytheyshouldsupportkeyKPI’sbyexplainingwhyperformanceismeeting/belowexpectations.Theyshouldalsogiveanin-depthpictureintohowwelleachsupplychainstageisperforming.However,theirusecallsforjudgement:Theyvaryacrosscompaniesandindustries(whichexplainsthelargequantityofmetricsavailable).ManyarenotdirectlylinkedtokeyKPI’sbutareusefulsecondaryindicatorsofperformance.Theydonotnecessarilylinktoperformanceatjustonestageinthesupplychain(butaccountabilitymustbeassignedtosomeonewithinonestage).Forexample:inaccurateordermakingcouldleadtomoretimebeingspentonpuchasing,suppliersdeliveringthewronggoodsand/orsuppliersdeliveringthegoodslate.