Supply Chain / Value Chain Metrics - Getting Started (4) The Multiple Dimensions of Value Chain Measurement

There is, probably, no single measurement that effectively captures the health of a value chain, even though it may be easier to evaluate a value chain than an organization.

When you are performing a financial analysis of a company you expect to use multiple measures like: sales, costs, profit, and inventory. Managers and analysts understand that profit and loss statements and balance sheets provide multiple measurements in an attempt to capture a total picture of the organization. On the other hand, I have seen countless project teams use a single-point of measurement - cost, as their only measure of success in their value chain improvement project.


If you want to significantly reduce your costs - eliminate your product line. You should be able to drive your costs (and inventory) to zero. Sound crazy? If your only criteria is cost savings or cost avoidance, the elimation of a product makes perfect sense. While it may be a sound strategy if you are trying to close a business or business line focusing on cost reduction may be less important than improving your service level to your customers if you are trying to increase sales.


Just like you use multiple financial metrics to evaluate the business health of your organization, multiple operational metrics are necessary to properly evaluate the operational health of your organization. In a perfect world, your operational metrics will link to your financial metrics.


For a value chain / supply chain analysis, what business dimensions should you attempt to measure? As opposed to identifying metrics and trying to figure out how to use them, it may be useful to determine high level business performance and then derive the metrics that would help to drive changes in performance.


Revenue Value chain operations directly impact sales. Not only are sales and marketing activities directly linked to the generation of demand for products, product development, product quality, product delivery, and customer service / support. Because of the complex interrelationship of these activities it is useful to look at:

• Demand Generation (How effectively you establish a need for your products and services).
• Product Development / Introduction (How quickly and effectively you develop and introduce new, or modified, products and services).
• Service Level (How successfully you serve your customers through meeting their expectations/ your commitments to them).

Cost The cost of your operations will clearly determine how much profit you can make or, in the case of not-for-profit organizations (like government agencies) how much service you can provide. Cost generally falls into two categories:

• Direct Cost (The costs associated with producing the specific product or service).
• Indirect Cost (The costs associated with the business that are not specifically attributable to a specific product or service).

Asset Management (How effectively you use your assets changes your financial performance. More effective use of resources translates into a competitive advantage.

• Inventory Carrying raw, WIP, and finished goods inventory incurs a real cost as well as an opportunity cost.
• Payables When suppliers extend credit (e.g., 30 days net) to their customers, they are essentially making loaning assets.
• Receivables On the other hand, when you allow your customers to pay after delivery (e.g., 30 days net) you are making a loan of your assets. While it is may be beneficial, even necessary, for a sale, it means it may take longer for you to see a return from your assets.

Time Time is a critical factor in the success of any business. When evaluating value chains we frequently think in terms of time to market (the time between when a product is conceived to the time when it is first available for sale in the market). Sophisticated businesses understand that equally important may be time to volume. Nimble competitors can overtake a more innovative company if their manufacturing or distribution excellence allows them to imitate a product and make it available while the innovator is still trying to ramp up. Time metrics are interesting because shorter cycles times are usually less expensive and provide higher levels of customer satisfaction. It should be easy to understand that if you replace ground or sea transporation with air, you might get a shorter cycle time at a higher cost.

Agility The ability of the organization or value chain to adapt to unexpected changes in the market place.

These dimensions provide different, equally valid perspectives of the same value chain. While a Vice-President of Sales may focus on revenue, a Chief Operating Officer or a Transporation Manager may focus on cost. In a given quarter, a finance director may be focused on receivables. The challenge in a value chain analysis is to prioritize and balance these dimensions.

It is equally important to understand that priorities are going to shift between business and product lines. Many analysts and businesses struggle when they try to apply a one size fits all strategy to their businesses or products. (IT organizations frequently fall into that trap as they try to develop "common" processes or establish governance). The challenge is identifying common dimensions, metrics, and processes and varying their performance to effectively manage multiple and disparate product lines.

Supply Chain and Value Chain Benchmark Reports and Studies Update

This is the latest revision of the supply chain and value chain benchmark report and studies list.

In this revision I have added the SAP and the America's SAP User Group benchmark series. There is a series of benchmarking reports which extends across most supply chain processes, product development processes, and finance / human resource activities. They provide a sample of the benchmark reports on the SAP site.

The surveys are links which are clickable and should open to their respective sites. I envision that future additions will add more benchmark reports, provide a short description for the surveys, and identify what part of the value chain / supply chain is included in the report.If you are aware of a benchmarking study or resource that should be included in this report please let me know.

Supply Chain and Value Chain Benchmark Reports and Studies Update

This is the latest revision of the supply chain and value chain benchmark report and studies list.

In this revision I have added the National Association of Manufacturers (NAM) which provides education and research (via the Manufacturing Institute) for its members in support of the US manufacturing base. Of particular interest, to me, is the "outlook" report it publishes in cooperation with Fortune magazine. While at first glance, the report is "US-centric," international suppliers, investors, and customers will understand the importance of a yardstick which measures manufacturers confidence in the market place. Technology providers might pay attention to the survey summary on the site which projects future investment.

On another note, I was reminded of the NAM report via a Supply Chain Brain article entitled "Value Chains Replacing Supply Chains." The article referenced the CRM Buyer and the NAM.

The surveys are links which are clickable and should open to their respective sites. I envision that future additions will add more benchmark reports, provide a short description for the surveys, and identify what part of the value chain / supply chain is included in the report.If you are aware of a benchmarking study or resource that should be included in this report please let me know.

Supply Chain and Value Chain Benchmark Reports and Studies Update

This is the latest revision of the supply chain and value chain benchmark report and studies list.

In this revision I have added the National Retail Foundation which provides benchmark information for that industry. The benchmark reports be interesting to manufacturers and distributors who provide products and / or services to retailers. The monthly Port Report may also be of interest to companies outside the retail industry.

The surveys are links which are clickable and should open to their respective sites. I envision that future additions will add more benchmark reports, provide a short description for the surveys, and identify what part of the value chain / supply chain is included in the report.If you are aware of a benchmarking study or resource that should be included in this report please let me know.

Supply Chain / Value Chain Metrics - Getting Started (3) Government and Non-Profit Organizations

I have been fortunate to have worked with organizations in a wide variety of industries. As I was preparing the next entry in this Getting Started series, it occurred to me that I was writing it using language that would be most suited for those in, and working with, private for-profit companies.


One of the challenges that intrigues me in writing these blog entries is trying to describe my understanding of concepts and practices that I have used or seen used successfully in a style that effectively communicates to senior business executives, financial managers, functional or department managers, IT professionals, process modelers, small businesses, academicians, and anyone else who elects to read them.


During the course of these entries I hope I remember or am reminded to talk about how measuring business performance in process industries is similar to measuring performance in discrete industries. (That doesn't mean that there are not measurements and practices that are more suited to one industry than the other. It does mean that on time in full delivery, an example I used in my previous entry, can be used for either industry with equal success.)


More challenging might be trying to convey the similiarities between non-profit organizations and for-profit organizations. A government agency can provide a good or service to its "customers" just like a for-profit company. While it may not seem to make any sense to talk about revenue or profit margin as drivers for government or a not-for profit organization, there are more similarities then not. In the late 1990s, the US government commissioned a study that to determine whether or not commercial metrics could be applied to government performance. Ultimately, the government determined that metrics used by private industry translated very well for government use.


There are some adjustments that a government organization or not-for-profit organization will have to make. In some cases, revenue or sales measures don't seem to make sense. This top line of a profit and loss statement is fairly essential when doing some calculations. Substituting a budget allotment for sales fills the shortfall. (For-profit organizations may use the same technique for cost centers.) Similarly, the concept of profit may seem critical for private industry but irrelevant for government. There are any number of illustrations in which private industry sets profit goals to zero or negative (loss leaders or key value items) while government organizations employ revenue and profit goals.


As I describe how to get started using metrics, I recognize that I am not providing exhaustive descriptions that will necessarily align with every sector, industry, company or organization. I ask readers to view these entries in the broadest sense and if you have an unresolved question about applying to your situation feel free to make comments.

Supply Chain / Value Chain Metrics - Getting Started (2) Benchmark Programs

The holy grail of business information for the executive, analyst, or consultant is benchmarking. When I was with the Supply-Chain Council, I estimated that about half of the organizations that joined were looking for benchmarking information. For over ten years, I probably spent some time at each face-to-face meeting or workshop answering questions about benchmarking. Things haven't changed much since 1996 and the dangers and pitfalls of working with benchmarking programs are much the same.

For some time I have been building and maintaining a list of benchmarking programs, on this blog, that are related to value chain operations. While this may provide a half way decent starting point to find resources, it is not intended as a blanket endorsement for the surveys on the list. It would also be very unusual for a company or organization to participate in all of the surveys.

So, how do you sort through list and find a program that might help you get the information you need? If you are working with a consultant who has a private benchmarking program, how do you qualify their list? What questions should you be asking?

About Benchmarking

While everyone wants benchmarking information, it is difficult and expensive to run a decent program. You might remember a college statistics course that spent an agonizing amount of time trying to teach you how to craft good survey questions, how to determine whether or not you are getting valid data, and how to determine what the data means. In the world of business, those questions can be pretty important but some companies are so eager for competitive information they don't invest the effort to qualify the source of their data. (For anyone who hasn't read it I highly recommend How to Lie with Statistics - a good, light read which helps remind people that seeing survey results, pie or bar charts on a website or in presentation is no guarantee that it is based on sound data).

Many "free" benchmarks reports are available to companies who are willing to respond to a survey. For example, you may be asked to complete a survey on the use of supply chain technology (RFID) for example. You will be referred to a website or online survey that collects your responses (usually takes 15 or 20 minutes). Your results are then used with other anonymous respondents to produce reports (which are sold and used as marketing collateral). A statistically significant number of the other respondents in the survey may have no investment or authority over supply chain technology but will enter data to receive the report - they make their best guess.

While it may take little time to enter data into an online survey, it may take a significant investment in time to collect and measure data. (The average time it takes for multi-national companies I work with to collect and report performance measurements for the first time is 3 months. I have seen companies spend months just deciding what KPIs or metrics are important. Most data is ready available somewhere in the company. Tracking information down, reformatting, and making sense of it takes time. After the first effort, most companies can measure and report their peformance in relatively short time periods. Of course, if you only collect information every 30 days, there is not much merit in demanding reporting faster than that.) Many companies are investing in business dashboards now which can collect and report performance information in "real time." More on business dashboards in another entry.

A careful purchaser of benchmark services understands that the benchmark service provider is spending resources to run the benchmark program and it will require an investment on the part of the purchaser to collect and report information.

Benchmark Scope

What are you trying to measure?

Probably the first question to address if you are considering a benchmarking program is: what are you trying to compare and to whom do you want to compare yourself? If time to market is an important operational measurement to you, it is important that the benchmarking program reports the metric or provides enough information to help you. If you intend that time to market includes product design, manufacturing, and distribution, a supply chain benchmarking program might not include enough information. A product design / development program probably won't have enough. A marketing and sales set of data might not either. You may have to use multiple programs or look for research programs that are specific to "time to market."

Identify the key metrics or KPIs you want to examine. You know you will probably be able to get general P&L and balance sheet numbers from public records or your marketing department. Pick high level operational questions you need to compare. While supply chain velocity may be too ambiguous for meaningful measurement, order fulfillment time or order fulfillment cycle time may be right on target.

I would also recommend that you pick multiple aspects or dimensions of the business problem to examine. There may be little merit in finding that a competitor has higher transportation costs without also realizing they have shorter delivery times and carry less inventory.

To whom are you trying to compare the company?

Most companies want to participate in benchmarking programs that will identify their weaknesses and strengths so they can become stronger in their market space. If you have worked with any competitive analysis you will be familiar with grouping companies by industry. There can be issues with relying on too easy a classification. If you visit the public sources of information that I identified in Part 1 of this series you will find that in many cases they don't group companies the same way or even use the same industry classifications.

Equally challenging, a large company may have multiple product lines that compete in what are intuitively different industries. For example, the largest provider of IT to the federal government is in what industry? Technology or information technology? No. Business services and solutions? No. The answer is Aerospace and Defense and the company is Lockheed Martin.

Even the best benchmarking programs (and consultants) may not group companies to allow you to compare apples and apples. There are two reasons.

First, if you are are comparing organizations instead of value chains (logistics vs. supply chains) you don't differentiate by products or product family. From a financial investment perspective it makes sense to compare how an organization manages their combined investments and businesses. If you are trying to improve your competitiveness in the marketplace, you are probably looking for information about well you generate demand, identify and satisfy demand and how efficiently you conduct the operations. It requires significantly more initial research and analysis to group by product and product lines.

The second reason benchmarking programs tend to group by industry and, indeed, very general industry categories is a very simple numbers game. If you are investing the time and money to participate in a benchmarking program you want to be able to compare yourself against as many of your competitors as possible. So, it is in the best interest of the benchmark program to have as few buckets as possible. How many Aerospace and Defense companies are there? How many aircraft manufacturers? How many manufacturers of large commercial aircraft? For many benchmark programs those questions are unimportant. For the business executive who understands that defense aircraft production is a cost-based market space (where the customer knows the cost of the product and negotiates the margin) and that commercial aircraft is a price-based market space (where the customer negotiates the price and may not know the cost) the difference is enormous. If you are a Boeing executive trying to benchmark your company it may be far less important to have a dozen companies to compare yourself to than one company, if that one company is Airbus. Of course, if you are selling or providing benchmarking services and you are trying to sell to Aerospace companies, you may be willing to group a manufacturer of aircraft landing gear gaskets and seals with the manufacturer of a helicoptor.

Besides determining who is in your industry (or product grouping) you may want to determine whether or not you want to limit yourself to your competitors. There is ample evidence that world-class organizations try to determine what the best-in-class organizations in other industries are doing. Why? Because breathroughs in competitive advantage may be developed by someone who is performing the same process for different customers and in support of different products. For example, most companies have to purchase goods and services. Best practices in purchasing like vendor managed inventory may be equally effective in different industries - but someone will do it first. Benchmarking may point to best practices or operational effiiciencies that have been captured in another industry and may be realized in yours. Of course, if you participate in a benchmarking program that is restricted to your industry you may not see the opportunities.

My recommendation is to participate in the broadest (cross-industry) program you can find that also gives you the detail that you need. If you are working with a consultant or benchmarking provider that support multiple industries, it may be possible to participate in a detailed study but have access to the summary information for other industries.


Qualifying the Benchmark Provider


After you have developed a short list of benchmark providers, there are probably a number of areas you should explore with the providers. I would qualify them just like you would any other major buy.


Price and Obligations


There is typically a set of conditions, including price, for participating in benchmark programs. These include:

• Price. Frequently benchmarking is a subscription service. You put your data into the pot and can extract data that is comparable within the same time horizon. Issue: What is the length of time data is "comparable?" To make sure that some surveys have enough participants sometimes the time period can be 18 months or two years. Economically, that can be the difference between boom and recession. Within a market, major competitors may have come and gone. Products that dominated the market may be obsolescent.


• Data Contribution. You must contribute data to receive data. If everyone could buy the data without contributing, programs would rapidly run out of results to share / sell. Theoretically this also means that consultants and vendors - who don't have data to contribute - don't have access to the benchmark results. Right.


• Confidentiality. You may be asked to sign a non-disclosure agreement which could limit your ability to share the information with your partners. This can be particularly problematic if you work with consultants, technology providers, or may need to work with them in the future.


• Anonymity. The contributor of individual data remains anonymous. There is some variation in programs but basically this means that if you report how long it takes for you to design a product, no one will be able to determine that the specific time belongs to you. (When I was a practitioner, I was invited to participate in a benchmarking program that promised anonymity. In my industry, there would have been two participants - my company and a major competitor. I might not be a mathematician but if there are two participants in a survey and I am one of them, I can figure out what data the other guy contributed.

Benchmark Population

While we have already talked about the issues with industry grouping, be very sensitive to benchmark programs that talk about 10 or 20 years of data and hundreds of participants.

• Current Population. Determine the current (active) number of subscribers for the service you wish to obtain results from. If you are going to participate in an industry survey get the number of current subscribers, verify that they participate in the same survey, and try to determine you are comparing the same products / product families / businesses. Ideally, get a list of the active subscribers. Verify that benchmark reports don't blend former participants with current participants. If there are a hundred companies in the study you may want to verify that these are companies that contributed data to participate in the current study as opposed to being "grandfathered" in from previous "similar" studies.


• Benchmark Study History. A number of long-term studies and reports change their survey questions from study to study. An annual benchmark report may not change its title but change its content on an annual basis. It is useful to compare questionairres for multi-year studies (and executive summary data).

Metrics, KPIs, and Test Question Validity

• KPIs and Metrics. I will talk about selecting and defining metrics in other blog entries. For now, let's say there is little agreement within a company, between companies, between analysts, well between anyone about what or how to measure just about anything. That's a problem if you are doing benchmarking. Issue: Are you measuring the same thing? For example, if you are interested in customer service levels one measure you might be interested in is On Time In Full Delivery (OTIF). OTIF is understood by some pracitioners as the percentage of orders that are delivered when specified (neither early or late) and are complete based on the customers order. Some practitioners don't capture receipt information and so they calculate OTIF as a percentage of orders that are shipped on time and complete. Others calculate OTIF as the percentage of orders that are shipped on time and have an estimated shipping time that would have the product arrive at the customer's site on time. Those are three very different calculations that could potentiatlly lead to very different results. On many occassions I have seen companies puzzled by customers who complain about on time delivery. The company looks at their measurements and see OTIF number of 95-98%. The customer is complaining that OTIF is less than 80%. Frequently what is happening is the customer is measuring when they are supposed to receive the order and the company is ordering when it was shipped. The mismatch in measurement leads to misunderstanding and a loss of business.

• Metric Standards
  
  Some of the benchmark programs will advertise that they use a "standard" set of metrics. Having spent over a decade working the members of the Supply-Chain Council in trying to get consistent, well-understood metric definitions I can tell you that these standards are elusive. I would certainly agree that a reference library is a useful "truth" source for measurement data. There may also be great value in having a company-neutral source of metric definitions.

• Data Collection and Measurement - Validity of the Results If you do a bit of research on how the benchmark providers "assist" companies in assembling and contributing data (try to find presentations or webinars that provide guidance to propsective participants in collecting and post data) you may get a sense for how long it takes and what assistance the benchmark providers offer. I have seen in multiple presentations benchmark providers relate how they will help a company "guess" on performance results if the measurement data is not available. This should raise a red flag for anyone planning on seriously using the benchmarking data for business planning. Issue: If a provider enables the entry of questionable data they are committing two sins. First, they are skewing the results of the benchmarking - you may not know what a "real" answer is. Second, they are effectively hiding what participants know and don't know about their operations. It may be as valuable for a company to know that no one in their industry knows how to predict the time it takes for a concept to transition to the manufacturing floor as it would be to guess the time plus or minus 100%.

Benchmarking programs and surveys can be an invaluable source of information when you are first starting to systematically use KPIs and Metrics for your value chain. Working with a reputable benchmarking provider will not only provide you competitive information but the provider can help educate you in how to collect and measure your value chain - what is meaningful and why it is meaningful. If you don't exercise due diligence, you may find that you are investing time and resources in an exercise that provides little value and can lead you to investments that provide little return.

While this entry dealt primarily with formal benchmark programs, many of the large consultants and integrators offer versions of benchmarking where information is shared among their active clients. The business information as advantageous (or meaningless) as well run (or poorly run) commercial and academic programs.

Many large practitioners operate large performance measurement databases in their purchasing departments (to review their suppliers) and in their marketing and sales departments (to review performance to their customers). These internal sources of information may be used by an enlightened company to provide an "internal" benchmarking program that may be better and more extensive that one that could be purchased.

Supply Chain / Value Chain Metrics - Getting Started (1)

In the years that I have been working with companies in identifying and implementing supply chain and value chain improvments, I have watched how strategies change based on the prevailing economic conditions. In good times, when companies are struggling to meet demand and respond to market growth, successful companies invest to improve their operations, improve their margins, and increase their revenue. In bad times, when facing recession and business slowdown, successful companies invest to improve their operations, reduce their costs, and protect their margins. The constant drive to improve performance does not change - what may change is priorities.

I was reminded, recently, that a change in market conditions may require a fresh look at your business. Whether you have years of experience as an executive, you are a new manager or analyst, or you are a consultant / technology provider, sometimes you need to start from scratch. Businesses have proven, for years, that an outside perspective (consultant, research firm, partner) may challenge internal assumptions and lead to dramatic business change.

I thought it may be useful to provide a description of how I have "gotten started" when I have looked at companies and organizations for the first time. (I will be writing this in several installments). I supsect that most of this will be a pretty basic roadmap and I apologize to the more experienced among you. For the IT and sales account managers, the roadmap is essentially equivalent to a basic method for requirements definition or "discovery."

The approach that I will be outlining is based on a top-down approach.

Step One - Collecting Business Information

Unless you are a very small business, the odds are you provide more than one product (good or service) to your customers. In the case of the mid-to large company, the chances are that you have multiple businesses which each have multiple products. The first thing I try to do is get a sense of the company / organization and how it performs in the marketplace.

At the most basic level, what I would like to have is a description of the company, what products it provides, who the customers are, what it is trying to do in the markeplace, who its competitors are, and how it is performing. Not much, is it?

In the last 10 years, the freely available and accessible information has exploded. I typically start with an internet search. Here is how I frequently start:

Visit the company's website. Normally the company will provide a description of its goods and services, press releases, and information they want the public to know. (Not surprisingly, it is not uncommon that even senior executives are not aware of everything that is posted on their website).

On the websites of publicly traded companies, there is frequently a link for investors or investors relations. The information that you can find at these sites varies widely but frequently you can find:

• Annual Reports



• Quarterly Reports



• Other SEC (US Security and Exchange Commission) filings



• Analyst Briefings

The first three items on the list form a basic starting list of information whether you are doing a value chain performance analysis or a financial analysis. The United States Security and Exchange Commission (SEC) has simplified finding much of this information since it is available through EDGAR (Electronic Data Gathering, Analysis, and Retrieval of SEC filings).

A company's annual report contains two important financial statements: the balance sheet and the profit and loss statement. Additionally, the annual report typically provides management's view of the business, vision and broad plans for the future, assessment of the marketplace, and their identification of operational and financial risks.

For large businesses, the financial reports will usually identify major business segements and the markets in which they operate. Since this business segmentation helps in determining the scope of the value chain, it is important for the novice analyst to understand that how the business slices and dices its organization and rolls up financial reports may or may not reveal important details of the organization. (If you randomly select public companies and visit their websites or read their annual reports you will find that quite a bit of variation in how much detail they reveal about their organizations. Some of this is a result of trying to concisely report the general health of enormous organizations. Some, is simply a result of trying to safeguard competitiveness).

Check public business resources. There are countless resources for buying business intelligence. Before you spend your money, I would recommend starting with some free or virtually free resources.

I use all of these resources when I start - each for different reasons. This doesn't mean that there aren't more places to start your investigation. They may be (The Reuters site provides some of the most complete company overview / descriptions. The Businessweek site provides very good information on competitors and industries). Information access may very based on whether or not you subscribe to a periodical.

Businessweek

CNN Money (Fortune, Money)

Forbes

Reuters

Yahoo Finance

Subscription Services. When starting a value chain analysis for a medium or large company, it is frequently useful to see more detail regarding the organization of a company. Where are products manufactured, where are the warehouses, where is the sales organization, etc. That level of detail is very difficult to get from public sources. A relatively low-cost research option that I have used in the past is Hoover's, a research arm of Dun and Bradstreet. Hoover's has a "family tree" option that often provides substantially more information that is publicly available.

It is possible to purchase individual research reports for businesses. Obviously, due diligence is required to insure that you are buying information you can't get with a little of searching and the cost of the report can be in the hundreds or thousands of dollars.

Company Information. Whether you are an analyst, an executive, vendor/consultant, or an IT organization, once you have started working with a company it is useful to gather internal information (not typically publicly available) for initial reference. The information should include:

• Organization Charts


• Mission Statements


• Strategic (Long-Term Plans) and Business Plans

This assemblage of information should provide a basis of understanding of the company's markets, product lines, geographies, customers, and basic performance.

This first "quick look" of a company should only require a few days. You may spend more time in subsequent phases of analysis or implementation in getting more detailed information, testing assumptions, and answering questions.

In a perfect world, benchmarking information would be available to support this part of the analysis. In my next entry, I will spend a little time discussing benchmarking and participation in benchmarking programs.