SCE 6RevE Lesson Six Performance Measures

SUPPLY CHAIN ENGINEERING
2010-2014 William T. Walker
Page 6-1
Performance measures are called by different names including

"metrics", "analytics" and "key performance indicators (KPI)".
Some organizations believe in having dozens of KPI's, while other
organizations run their businesses with just a few.
Supply Chain Engineering is often tasked with the definition of new
KPI's to help focus attention on particular operating issues. This lesson
explores the issues to consider when designing, implementing and
maintaining a particular KPI.
KPI's are essential tools to align and focus the efforts of individual
trading partners for the benefit of the end-to-end network. This is
because the global optimum is not merely the sum of the local optima.
This lesson will also introduce the Value Circle as a graphical method
used to drive real competitive improvement throughout the network.
Page 6-2
Let's conclude network design and summarize the course so far

The design of a supply chain network begins with an understanding of the
market to be reached and the product to be sourced. The product must have
a competitive price in the market relative to the competition.
Selecting a DELIVER relationship is based on market reach within delivery
lead time, throughput capacity and labor cost. Outbound logistics cost
contributes to this decision. A supply chain network typically has multiple
demand channels.
A composite BOM is developed from the full set of products expected to flow
through the network.
Selecting a MAKE relationship is based on capability, throughput capacity
and labor cost. Midbound logistics cost contributes to this decision.
Selecting SOURCE relationships are based on commodity, throughput
capacity and material cost. Inbound logistics cost contributes to this decision.
A supply chain network typically has a wide supply base.
Page 6-3
Once the trading partners have been determined, each and every orderto-delivery-to-cash connection must be defined.
Ordering is the information connection to place an order specifying the
customer's name, product configuration, quantity, price, ship-to address,
transportation mode, bill-to address and payment terms. Order connections
may take alternative forms.
Delivery is the movement of material from one inventory location to
another inventory location. A product shipment triggers invoicing.
Cash is the cash payment connection that completes the order-todelivery-to-cash cycle. Cash connections may take alternative forms.
Both the Factory and the Distributor operate value-adding processes, or
else they should not be part of the network.
Page 6-4
If SOURCE +MAKE +DELIVER does not achieve both the throughput

and the landed cost requirements, then the network design must be
iterated.
Next the cash-to-cash velocity and variability of the Factory is
determined and pushed as far toward a negative cash-to-cash as
possible.
The cash-to-cash velocity and variability of the Distribution Center is
determined and pushed as far toward a negative cash-to-cash as
possible.
This completes the determination of throughput, landed cost, and
cash-to-cash velocity and variability which is the top half of the
Requirements Specification.
Later in this lesson a method will be described for plotting throughput,
landed cost, velocity and variability on a Value Circle.
Page 6-5
There are three types of measures: Absolute measures, relative

measures and benchmark measures.
Absolute measures are traceable back to a primary reference. For
example, if you measure air temperature in degrees Fahrenheit with a
thermometer, the thermometer measuring device can be calibrated
back to a primary temperature reference.
Relative measures compare a change against a reference. The
reference is not calibrated.
Benchmark measures compare a process in one industry with the
same best-in-class process across all industries.
The Supply-Chain Council's SCOR Model Plan, Source, Make,
Deliver, Return - www.supply-chain.org is one framework used to
collect benchmarking data for member companies.
Page 6-6
All performance measures have three attributes: Repeatability,

Accuracy and Resolution.
Repeatability means you will get exactly the same output every time
you provide exactly the same input.
Accuracy means that the output will be correct. For example, go
versus no go, or a measure less than a specification or a measure
greater than another specification.
Resolution means that you can differentiate between states. For
example, the temperature is 68 degrees, not 67 not 69; the
temperature is 68.3 degrees, not 68.4 not 68.5; the temperature is
68.35 degrees, not 68.34 not 68.36.
In business systems repeatability, accuracy and resolution can
change over time because of the dynamic nature of the underlying
data.
Page 6-7
Key performance indicators (KPIs) are global performance

measures used to optimize the end-to-end supply chain.
KPIs provide critical alignment by augmenting, not replacing the
financial scorecard.
KPIs are defined to reflect the needs of the end Customer and to
measure whether or not the supply chain is capable of meeting
Customer demand.
KPIs are measured close to real-time, and therefore they give early
warnings about the financial outcome for longer time periods.
KPIs can be used to anticipate and resolve potential problems
before these problems cause an irreversible financial result.
Page 6-8
There will be times when a new performance measure is required.

The task of defining, implementing and maintaining a new KPI can be
difficult.
However, all KPI's hold the attributes shown on this slide in common.
The definition of a KPI should avoid silo (purely functional) thinking,
and instead contribute towards focusing the trading partners toward
maximizing network throughput.
A KPI should have one owner even when this KPI extends across
multiple trading partners. This will help to lead to accountability and
trust regarding this specific performance measure.
The inputs, outputs, data collection, computational details and
updating mechanism must all be clearly spelled out and documented.
Page 6-9
One important key to defining a good, global performance measure

is to measure across the supply chain node.
A common, but incorrect practice is to measure within the node; for
example, the cost or efficiency or inventory within the node.
The cycle time from a Customer node end-to-end to a Supplier node
is a good example of a global performance measure. The cycle
times for each trading partner are displayed together on a
performance dashboard.
In order to optimize cycle time non-value-added time must be taken
out of the total process connecting the Customer node with the
Supplier node.
What makes this a global measure is the possibility that cycle time
within one of the nodes may actually increase yet total cycle time
may be reduced.
Page 6-10
A more generic question is when in the process does the performance

measure begin?
Sometimes data cannot be collected at the time or in the place at the
logical starting point.
Create a detailed process of the front-end process to include the
people responsible for each step and exactly where, how, how often
and to what resolution data is collected.
Next, consider if some kind of external data source can improve the
measure. Research the possibility of employing technology to get at
previously inaccessible data.
In this example Point 1 is the preferred starting point as long as
extreme variability can be eliminated from the product configuration
specification and Customer credit checking process steps.
Page 6-11
An equally generic question is where in the process does the

performance measure end?
Sometimes data cannot be collected at the time or in the place at the
logical ending point.
Create a detailed process of the back-end process to include the
people responsible for each step and exactly where, how, how often
and to what resolution data is collected.
Next, consider if some kind of external data source can improve the
measure. Research the possibility of employing technology to get at
previously inaccessible data.
In this example Point 4 is the preferred ending point as long as there is
a reliable way to collect the external delivery date. One alternative
solution may be to sample Customer deliveries by geography.
Page 6-12
A supply chain trading partner wants a performance measure to drive

improvement in delivery performance.
Data is readily available regarding order dates taken from sales orders
and shipment dates taken from shipping files. The numerical difference
between these two dates is taken to be the days of order-to-delivery
cycle.
This data is collected for a couple of weeks, then plotted in a
histogram showing the number of occurrences versus the number of
order-to-delivery days.
When graphed, the data shows an order-to-delivery distribution with
some mean number of days and some deviation factor. This graph also
shows a few outliers with very long order-to-delivery days.
The question becomes, "How real and how representative is the
result?"
Page 6-13
There must be some mechanism to provide periodic data updates for

each KPI.
In this example the KPI looks at a data window that is rolled forward
week by week. Depending on the nature of the data, the number of
data points can vary from one time period to the next.
The best data updates are performed with reports formatted
automatically within a company's information technology system.
Manually collected data is much more difficult to manage and control.
Data originating from another trading partner may be implemented
either as an automated data feed or manually collected.
Page 6-14
At some point early in the design of a KPI the measurement and its
results should be validated against the actual process being measured.
As the understanding of a process is detailed and documented, the
definition of the performance measure becomes refined.
The process in this example consists of four logistics delivery modes:
UPS Next Day, UPS Ground, Less-Than-Truckload (LTL), and
International.
The performance measurement must account for the fact that the
process steps change as the delivery mode changes. UPS Ground
service is the simplest process and International shipment is the most
complex.
The source of measurement data also changes with the delivery mode
change. Notice how delivery date information switches from UPS to the
Customer to the Freight Forwarder.
Page 6-15
A KPI can be improved by combining internal and external data.

In this example the ship date generated internally is combined with
external data describing the actual transit time to compute total order-todelivery days.
Be alert to nuances that can skew measurement data. For example, is
time measured in calendar days or work days? Does a date/time
measure correctly adjust for time zone differences?
With these measurement refinements it is now easy to see that there
are three different delivery performance groups driven by ground, LTL,
and international transportation modes. In the earlier, less refined
measure, we first thought the longer delivery times were just variances or
"outliers".
The next challenge is to separate the dispersion in UPS Ground orderto-delivery delivery differences that are driven by geographical transit
times from those that are caused by process variability.
Page 6-16
The proper development of a KPI often involves managing functional

perceptions. This occurs because the people working within one
function often don't understand the inner workings of other functions.
In this example the Factory may gloss over, or misunderstand, the
Sales process steps of making sure the order is complete and the
Customer's credit is approved before releasing the order.
In this example Sales may gloss over, or misunderstand, the Factory
process steps of making sure that inventory is available, the shipping
documents are complete and transportation has been arranged before
the product can be delivered.
Such misperceptions can wear at the interface between functional
areas and cause a lack of trust between the two parties.
A collaborative review of the process maps for order entry and product
shipment can go a long ways towards tearing down such barriers.
Page 6-17
When an actual measured KPI does not live up to expectations, then

the root cause of the variability must be determined and eliminated or
minimized.
The credit checking process is notorious for having high variability that
exceeds the Network Design Requirements Specification.
This slide lists some of the reasons why credit checking might have
variability. There are others.
Statistics should be kept on the number of times each of these was a
root cause and the number of days per occurrence that the
specification was exceeded.
Then the process could be re-engineered to eliminate or minimize that
particular root cause.
Page 6-18
In this exercise you are presented with actual data from the completion
of sixteen Customer order. You should use this data to define the
problem and to prioritize where to work on the process.
Page 6-19
The solution is to understand that this problem requires an analysis of

the Order-to-Delivery process variability.
The data may be sorted from largest to smallest either by total O-D time
or by individual process step times.
Order K has taken 25 days to perform a credit check. Was information
missing? Was there a problem entering a new Customer into the system?
Did the request get lost on someone's desk?
Order N has taken 18 days for product delivery. Was the shipment lost?
Was the shipping documentation incomplete? Did the shipment get held
up in Customs? This process needs to be investigated.
Order H has taken longer than usual for both credit checking and product
manufacture. Was there a holiday or was material late arriving at the
Factory? Find out why.
Order E took 11 days for the product specification to be validated. Did
the Customer take this time or does the Sales person need training?
Page 6-20
The Value Circle is presented as a spider diagram with multiple axes and a
unit circle for reference. The order of each axis is fixed as shown.
Operational financial performance measures are plotted on four of the axes.
They are Throughput, Price/Landed Cost, Inventory and Return On Invested
Capital.
Throughput is directly related to Revenue. Price/Landed Cost is directly
related to Gross Margin, Inventory is directly related to Cash Flow. Return On
Invested Capital (ROIC) is directly related to Share Price.
Principle based performance measures are plotted on four more axes. They
are the Velocity Principle, the Variability Principle, the Visualize Principle and
the Vocalize Principle.
As discussed later in the lesson, the Value Circle can be used either to
compare an improvement with an existing supply chain network or to compare
a competitor with your own supply chain network. It can be used for a single
node like the Factory or for the whole network.
Page 6-21
The Value Circle graphic is directly related to the Requirements

Specification table.
The financial axis -- Throughput, Price/Landed Cost, Inventory and
ROIC -- are denominated in dollars, dollars, days and percent.
The principle axis -- Velocity, Variability, Visualize and Vocalize -- are
denominated in days.
The Cash-To-Cash specification has a Velocity component and a
Variability component.
The Delivery Lead Time specification has a Vocalize component and a
Visualize component.
Page 6-22
Step #1: Draw the unit circle.

Step #2: Add the four financial axis and label each in the order shown.
Step #3: Add the four principle axis and label each in the order shown.
Step #4: Number each slice of the pie as shown.
Step #5: Determine a scale for each axis.
Step #6: Plot each scenario relative to the unit circle. Each parameter
improves toward the origin.
Step #7: Calculate the area under the curve.
Step #8: The smallest total area is the most competitive.
Page 6-23
Use the equations on this slide to determine a numerical value which

can be plotted along a given scale for each financial axis.
The current value for each axis is plotted along a unit circle.
The Value Circle is a relative performance measurement too.
Comparative values plotted outside the unit circle are less competitive
in a relative sense, while comparative values plotted inside the unit
circle (closer to the origin) are more competitive in a relative sense.
Be dimensionally consistent with the use of $ and days throughout
the analysis.
The significance of each axis and their relative relationships are
explained elsewhere in this course.
Page 6-24
This is a simplified example of a Balance Sheet such as for a Supplier,

a Factory or a Distribution Center.
Total assets on the left exactly equal total liabilities plus net worth on
the right.
Current assets include cash plus accounts receivable (A/R) plus
inventory.
Fixed asset book value is the value of fixed assets adjusted by total
accumulated depreciation. Plant and equipment capacity assets are
part of fixed assets.
Total liabilities plus net work is the sum of current liabilities (one year
or less), long term debt (longer than one year), paid-in capital and
earnings retained from net profits.
Account payable (A/P) is part of the current liabilities.
Page 6-25
Return On Invested Capital (ROIC) is a financial ratio that combines

elements from both the Income Statement and the Balance Sheet. Changes
in ROIC ultimately get reflected in a company's stock price.
ROIC is expressed as a percentage. A higher percentage is better than a
lower percentage.
The design and operation of a supply chain network impacts gross margin
on the Income Statement which impacts after tax profit (net profit).
The design and operation of a supply chain network impacts the need for
capacity and inventory assets plus A/R assets and A/P liabilities (that
determine the cash-to-cash cycle time) on the Balance Sheet.
Page 6-26
Use the equations on this slide to determine a numerical value

which can be plotted along a given scale for each principles based
axis.
The current value for each axis is plotted along a unit circle.
Comparative values plotted outside the unit circle are less
competitive in a relative sense, while comparative values plotted
inside the unit circle (closer to the origin) are more competitive in a
relative sense.
Be dimensionally consistent with the use of days throughout each
analysis.
The significance of each axis and their relative relationships are
explained elsewhere in this course.
Page 6-27
The Value Circle compares the current set of As-Is performance

measures with the future set of To-Be performance measures.
Improvement along a given Value Circle axis always occurs when
moving toward the origin.
The As-Is number is always plotted as 1.0 along the unit circle.
When the improvement is a smaller number, such as cost or inventory,
divide the To-Be number by the As-Is number.
When the improvement is a larger number, such as throughput or
ROIC, divide the As-Is number by the To-Be number.
Page 6-28
Since the Value Circle is plotted using straight lines, the area enclosed by
adjacent axes and the plotted line represents a triangle whose area can be
easily calculated.
The general formula is:
Area = (1/2) (sin 45o)(Side1 Length)(Side2 Length)
Where the calculated area is dimensionless and used as a relative measure.
For the unit circle each slice of the pie has an area of 0.354 and total area
for the whole pie is 2.832 or (8 slices) x (0.354).
Since each axis is defined such that its parameter improves moving toward
the origin, a Value Circle with a smaller area is more competitive.
The Value Circle can be used to compare all eight parameters or a subset of
the parameters to validate a net improvement. This is important because it is
often the case that some parameters can get worse, while others get better.
Page 6-29
In this exercise you are presented with data from the current supply
chain and with a proposed improvement.
Complete the To-Be ratio column on this slide and the To-Be Area
column on the next slide to determine if this is an improvement?
Page 6-30
Page 6-31
This spreadsheet contains the input, equations and output for a Value Circle.
There are three groups of To-Be and As-Is columns. The first is the input.
The second calculates ratios relative to the unit circle. The third calculates
areas relative to the unit circle.
Once programmed, this spreadsheet can be used again and again by simply
changing the inputs.
Edit the text in the Axes Titles column to change the displayed As-Is value
of that axis.
Page 6-32
The top half of this slide shows the actual Excel equations used to calculate
ratios relative to the unit circle and to calculate areas relative to the unit circle.
The exact order of naming performance measures must be maintained
around the Value Circle.
Start with Price/Landed Cost as the first row to be plotted in order to get the
Excel radar chart to display correctly.
Notice that the ratios for Throughput, Visualize and ROIC are inverted
because these measures increase in value to improve while moving toward
the origin.
Notice that the area calculations are shifted down one row and wrap back
around to the first row. This is because the area calculations depend upon the
relative lengths of the boundaries between adjacent slices.
Page 6-33
Follow these 19 steps to program a Value Circle using Excel.
Page 6-34
This is an Excel generated radar chart plot of a Value Circle. Notice that the
As-Is value for each axis is stated in the axis title.
Page 6-35
In this example, a portion of the Factory's value-added is

outsourced to an additional trading partner. This might be to realize
lower labor costs on a product BOM.
The Factory shedding the work shows improved profitability on its
income statement due to lower effective labor costs and a decrease
in inventory assets on its balance sheet.
However total network inventory is increased and the network is
lengthened. The longer supply chain increases cash-to-cash
variability.
The longer push zone of the supply chain network requires more
forecasting effort while the pull zone shows less flexibility. Vocalize
and visualize performance are both degraded.
The Value Circle plotted on this slide highlights areas where
performance is improved, and where performance is reduced.
Page 6-36
Page 6-37
Page 6-38
Page 6-39
Page 6-40

SCE 6RevE Lesson Six Performance Measures

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SUPPLY CHAIN ENGINEERING

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

Performance measures are called by different names including

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

Let's conclude network design and summarize the course so far

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

If SOURCE +MAKE +DELIVER does not achieve both the throughput

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

There are three types of measures: Absolute measures, relative

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

All performance measures have three attributes: Repeatability,

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

Key performance indicators (KPIs) are global performance

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

There will be times when a new performance measure is required.

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

One important key to defining a good, global performance measure

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

A more generic question is when in the process does the performance

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

An equally generic question is where in the process does the

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

A supply chain trading partner wants a performance measure to drive

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

There must be some mechanism to provide periodic data updates for

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

A KPI can be improved by combining internal and external data.

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

The proper development of a KPI often involves managing functional

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

When an actual measured KPI does not live up to expectations, then

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

The solution is to understand that this problem requires an analysis of

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

The Value Circle graphic is directly related to the Requirements

2010-2014 William T. Walker

SUPPLY CHAIN ENGINEERING

Step #1: Draw the unit circle.