Last week, I was in Singapore at the SCM Logistics World 2009. My presentation was around how to build a weatherproof Supply Chain through the increase of visibility across the ecosystem. Having talked about the subject previously on this blog, I'd like to focus this time on a debate that took place amongst the participants, and this one was focused on how to look at the end-to-end supply chain holistically and identify how the performance of this one could be measured.

Over the last 12 to 18 months, companies have cut costs as never before. The smart ones have done this in such a way that their supply chains have become leaner and meaner, resulting in real savings that benefit the end consumer. In doing so, they have lowered the inventory buffers that shielded portion of their supply chain from variability and uncertainty in others, and as such increased the level of risk across the ecosystem.

So, understanding the supply chain, its dynamics, how it behaves, and implementing the management processes and governance required becomes critical. Many people will agree with the statement I just made, but it is how to do this that holds people back. Actually, when browsing the internet on this subject provides little useful information. Yes there are a couple software packages and the odd presentation (to be paid for), but nothing else. Interesting.

Companies have been focused on their supply chains for years, but they do not seem to have thought through how to measure them end-to-end. I believe there is no need to make things more complicated that they are. The industry has been using the SCOR^TM (Supply Chain Operational Reference) model for years. This model proposes for each node in the supply chain a series of KPI's. Could we use those for an end-to-end measurement? That was the debate in the corridors of the conference. Let's look at it in a little more details.

Let's look at the level 1 KPI's. The first one, Perfect Order Fulfillment, is really a Supply Chain KPI, as it relies on all partners in the supply chain to deliver their elements to ensure the final product is complete, meets the specifications and addresses the expectations of the customer. With the buffer inventories disappearing, the ecosystem is no longer compartmentalized and using this measure as an end-to-end one makes sense.

The second one, order fulfillment cycle time is an interesting one. Indeed, if the supply chain manufactures to order, it is clearly a measure of the supply chain performance. On the other hand, if the customer is delivered from stock, obviously there is only a portion of the supply chain that affects this measure. This demonstrates that not all KPI's are applicable in the same way to the supply chain. However, the exercise remains interesting.

The next three, Upside Supply Chain Flexibility, Upside Supply Chain Adaptability (The maximum sustainable percentage increase in quantity delivered that can be achieved in 30 days)  and Downside Supply Chain Adaptability (The reduction in quantities ordered sustainable at 30 days prior to delivery with no inventory or cost penalties)., are by nature supply chain measures, so do fit our approach here. The same applies to Supply Chain Management costs.

Cost of Goods Sold (The cost associated with buying raw materials and producing finished goods.  This cost includes direct costs (labor, materials) and indirect costs (overhead))  is one that is difficult to calculate across a supply chain as not all partners are willing to work "open books", which is what you would need to correctly calculate this metrics from a end-to-end supply chain level. So, this is probably not a good metric to go with. The same applies to two other metrics, the return on Supply Chain fixed Assets and the Return on Working Capital.

The last KPI, Cash-to-Cash Cycle Time is applicable for supply chains that work in a deliver order model, but not for the ones that deliver from stock.

All in all, a number of KPI's are useful and could be applied if the appropriate data can be gathered across the supply chain. From experience I do know the use of a small  number of KPI's already makes a large difference, so while we may want to think at creating a couple more, using the ones we already have, would help companies focus on optimizing their ecosystems and in turn improve their delivery capabilities in addressing the new opportunities that appear on the horizon.