supply chain guide to metric 270870

7/21/2019 Supply Chain Guide to Metric 270870

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G00270870

Supply Chain Guide to Metrics Hierarchies for

Manufacturers and DistributorsPublished: 6 November 2014

Analyst(s): Debra Hofman

The supply chain metrics that many companies are trying to work with now

are simply the sum total of functional metrics. Supply chain centers of

excellence should use this research to define and implement the supply

chain metrics that matter.

AnalysisMetrics continue to be challenging for Gartner's clients, and we typically hear of the following

issues:

Too many metrics

Inconsistencies in calculating the metrics

Endless debate over the definitions

Gaming the system

Lack of access to credible data

Disagreement over how to interpret the data

No single version of the "truth"

Metric "islands" of unlinked data

However, it's the first one that comes up over and over again: "We don't lack for metrics. Just the

opposite, we're awash in metrics. The question is, which ones really matter? Which ones should we

focus on to get real value?"

The reality is that most companies have not really designed their metrics portfolios. Typically, the

metrics have "grown up" from inside the functions that make up what we now call "supply chain":

sourcing and procurement, manufacturing, logistics, and planning. Each function had its own

cornucopia of metrics, and when those functions were pulled together under an umbrella called

"supply chain," the metrics came along with them. The supply chain metrics that many companies

are trying to work with now are simply the sum total of all those functional metrics, and it's not

working.


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Too many metrics and a lack of coherent organization to them leaves companies without the ability

to find correlations in the data that will give them real insights. Organizations will often hit their

metric targets, but miss the high-level corporate goals, not understanding why. Moreover, it's

expensive to track and maintain hundreds of metrics, particularly when no value seems to be gained

by doing so.

Companies need to step back and actually design the right metrics portfolios. These metrics need

to be aligned so the organization as a whole can achieve the overarching goal of the end-to-end

supply chain: profitable service that enables growth.

What's needed are three levels of aligned metrics, as shown in Figure 1.

Figure 1. Three Levels of Aligned Supply Chain Metrics

Ali

gnment

Level 2:

End-to-EndSupply Chain

Level 3:Functions

Level 1:Executive

Dashboards

SupplierQuality

SupplierOn Time

PurchaseCosts

DirectMaterialCosts

RawMaterialInventory

CostDetail

ProductionScheduleVariance

PlantUtilization

WIP + FGInventory

OrderCycleTime

PerfectOrder Detail

AP ARInventory Total

Cash to Cash

ForecastAccuracy

SCMCost

PerfectOrder

Manufacturing LogisticsSupplyManagement

AP = accounts payable; AR = accounts receivable; RM = raw material; WIP = work in progress; FG = finished goods

Source: Gartner (November 2014)

The three levels include:

Level 1 (the top level) contains the handful of supply chain metrics an executive should use to

track the high-level performance of each supply chain.

Page 2 of 12 Gartner, Inc. | G00270870


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Level 2 (the middle level) contains a midsize portfolio of metrics from across the supply chain. It

contains the right number of metrics to get a good sense of what's happening across the end-

to-end supply chain not so many that you get buried in the weeds, and not so few that there

isn't enough information on which to act. At this level, you can see enough to know where you

need to dive into the more detailed metrics in Level 3, and what you're looking for there.

Level 3 (the bottom level) contains the detailed functional metrics for source, make and deliver.

At this level, you can dive into the details, based on guidance from what you saw in the first two

levels. For example, suppose you saw in the Level 1 metrics that inventory is too high. In

addition, suppose that when you look at the Level 2 metrics, you see that one of the sources of

excess is in raw material inventory, and that it's likely related to poor supplier on-time delivery.

You can then look at the Level 3 metrics for sourcing and procurement to understand better

why suppliers are not on time and fix the issue, which, in turn, will help the inventory problem.

This approach is fundamentally different than the way most companies have historically used

metrics. Rather than starting the analysis by trying to make sense of all the detailed metrics in Level

3, start with the outcome and work back (or down in this case) in a structured and directed way.

There are three key points to take away here:

1. The goals for the Level 3 metrics must be aligned with the goals of the end-to-end supply chain

in Levels 2 and 1. The procurement, manufacturing and logistics groups should not be focused

only on their own metrics. So, for example, procurement cannot be measured only on unit

costs; it must also be measured on total supply chain cost and perfect order performance.

2. Companies operate more than one supply chain. Therefore, they need to set targets and

measure by supply chain. The metrics are the same for each supply chain. What's different are

the targets. For example, the cost targets for an efficient supply chain will be more stringent

than those for a responsive supply chain.

3. Companies should not aim to be best in class on every metric. Trying to be best in class on

every metric means that each function that makes up the supply chain is trying to be the best at

what it does as a silo, and typically, it will do so at the expense of another function. Instead,

focus the entire supply chain on delivering a profitable perfect order, and figure out what trade-

offs you will make to get there (see "Setting Supply Chain Targets: What Does Good Look

Like?").

Gartner has published the metrics for Levels 2 and 3, and these are summarized below. These

documents help define the metrics that matter for each portfolio in the end-to-end supply chain,

and how they are aligned:

Level 2 metrics are outlined in "The Hierarchy of Supply Chain Metrics: Diagnosing Your Supply

Chain Health."

Level 3 metrics have been published in three documents to date:

"Use the Hierarchy of Supply Management Metrics for Strategic Alignment and Enhanced

Performance"

Gartner, Inc. | G00270870 Page 3 of 12


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"Aligning Manufacturing and Supply Chain Performance, Part 2: The Hierarchy of

Manufacturing Metrics"

"Align Supply Chain and Logistics Performance With the Hierarchy of Logistics Metrics"

Note: These hierarchies are specific to manufacturers and distributors. Gartner has also publishedmetric hierarchies for retail, healthcare, and product development that provide additional industry

vertical and product perspectives (see "Retail Supply Chain Leaders Metrics Reflect Today's

Multichannel Environment," "The Hierarchy of Healthcare Supply Chain Metrics for IDNs" and

"Product Launch Dashboards, Part 1: The Hierarchy of Product Metrics" for details).

Research Highlights

The Hierarchy of Supply Chain Metrics

The Hierarchy of Supply Chain Metrics (see Figure 2; "The Hierarchy of Supply Chain Metrics:Diagnosing Your Supply Chain Health") is a three-tiered model of metrics. The top tier assesses a

company's supply chain health, while the two successive tiers diagnose the root cause of

performance gaps and provide insight for corrective action:

Strategic Benefit:The top tier of metrics is the 50,000-foot level, at which an executive can

assess, with just three metrics, the overall health of the supply chain and the high-level trade-

offs a company might be making. The demand forecast is at the top, not because it's an

outcome or a goal, but to highlight what an important driver it is of performance back through

the supply chain. Below it are the two metrics that, taken together, describe the outcome of any

supply chain: perfect order, a measure of responsiveness; and supply chain management cost,

an end-to-end cost metric that, taken as a percent of revenue, measures the profitability of thesupply chain. The goal of any supply chain and the purpose of the metrics in the next two

tiers is to deliver profitable service that enables growth by finding the right balance between

these two metrics for each supply chain a company operates.

Working Capital:The middle tier of metrics is the 25,000-foot view. This level uses a composite

cash-flow metric to provide an initial diagnostic tool. It's a time metric, and it's the components

of cash to cash that are useful in starting to look at the interdependencies between metrics. Are

your inventories high or low? Is your accounts payable balanced with your accounts receivable

times?

Operational Execution:The bottom tier uses a variety of metrics that support effective root

cause analysis and allow surgical, highly efficient corrective action. Metrics in this tier include

supplier and operational effectiveness indicators.



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Figure 2. Level 2: The Hierarchy of Supply Chain Metrics

SupplierQuality

SupplierOn Time

PurchaseCosts

DirectMaterialCosts

RMInventory

CostDetail

ProductionScheduleVariance

PlantUtilization

WIP + FGInventory

OrderCycleTime

PerfectOrder Detail

AP ARInventory Total

Cash to Cash

ForecastAccuracy

SCMCost

PerfectOrder

StrategicBenefit

WorkingCapital

OperationalExecution

Assess

Diagnose

Correct

AP = accounts payable; AR = accounts receivable; RM = raw material; WIP = work in progress; FG = finished goods


The critical message of the hierarchy is this: It's the interdependencies that make the metrics

actionable. Each metric by itself is of limited use. It's when you look at them together that you can

see the story of a supply chain emerge that allows you to take action. And it's when you look at

them together that you can consciously manage the trade-offs across the end-to-end supply chain.

While many companies already measure some version of these metrics, they typically don't look at

the metrics together in this way to find the right balance that will enable them to orchestrate a

profitable response to demand.

Refer to the Gartner Recommended Reading section at the end of this document for additional

research that describes how to implement a hierarchy of metrics in your organization.

The Hierarchy of Supply Management Metrics

The Hierarchy of Supply Management Metrics (see Figure 3; "Use the Hierarchy of Supply

Management Metrics for Strategic Alignment and Enhanced Performance") helps connect supply

management's performance with the rest of the supply chain. The term "supply management" here

includes strategic sourcing and procurement/purchasing. Supply management functional metrics



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help chief procurement officers (CPOs) and their staff contextualize and link strategic sourcing and

procurement's performance with supply chain metrics that measure the health of the company's

end-to-end value chain.

Figure 3. Level 3: The Hierarchy of Supply Management Metrics

Legend: SupplyManagementComponents

StrategicSourcing

P rocurement Combined

SupplyManagement

ValueAssess

WorkingCapital

ManagementDiagnose

DemandVolatility

SupplyMgmt.

Perfect Order

SupplyMgmt.Costs

APInventory(Consign/

Bail and SMI)

SupplyLiabilities

SupplyManagement

ExcellenceCorrect

RFxCycleTime

%SupplierThat Are

80%Spend

%Supplier

YOY CostChange

%SuppliersCompliant

Spend:% Rev. &% UnderMgmt.

%SupplierVisibility/Collab.

SupplyMgmt. Cost

Detail

SupplyMgmt.Perfect

Order Detail

%SupplierQuality

% SupplyMgmt.Spendon RFx

S2S/P2PCycleTime

%Supplier

OTD

Working Capital Components

Supply Management Components

AP = accounts payable; SMI = supplier-managed inventory; RFx = request for proposal or information; YOY = year over year; S2S =source to settle; P2P = procure to pay; OTD = on-time delivery


The Hierarchy of Supply Management Metrics is divided into three tiers:

Supply Management Value:Consistent with the end-to-end supply chain hierarchy, the top of

this hierarchy contains three metrics that allow companies to assess the overall health of supply

management. Demand volatility is at the top of the pyramid to emphasize its impact on the

supply management function, typically expressed in the supply portion of the replenishment

plan. The outcome is the balance between service and cost a profitable supply management

perfect order in this case and it reflects the contribution of the supply management function

to the goals of the end-to-end supply chain. Together, these two metrics indicate overall supply

management value that is, contributions to bottom-line margins and top-line revenue growth.



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Working Capital Management:The middle tier of metrics accounts payable (AP), inventory

and supply liabilities represents how supply management leverages long-term commitments,

assets and working capital resources to enhance corporate flexibility and liquidity, and to

enable profitable demand, supply/replenishment response and financial compliance. These

metrics complement the top tier, providing insight into overall supply management value.

Supply Management Excellence:The lower tier of metrics shown in two rows ensures

that a foundation of business processes and best practices is in place to create the positive

performance measured at the upper tiers. The metrics shown are some of the most commonly

used across multiple styles of supply management. The upper row contains metrics related to

strategic sourcing. The lower row includes two groups of excellence metrics: procurement and

combined details related to perfect order and cost. These metrics require additional levels of

submeasures and business processes to ensure that the right methods and procedures are in

place.

The Hierarchy of Manufacturing MetricsThe Hierarchy of Manufacturing Metrics (see Figure 4; "Aligning Manufacturing and Supply Chain

Performance, Part 2: The Hierarchy of Manufacturing Metrics") helps connect manufacturing's

performance with the rest of the supply chain. The three tiers in this hierarchy include:

Manufacturing Reliability:Consistent with the other hierarchies, the top of the manufacturing

hierarchy includes three metrics that allow companies to assess the overall health of

manufacturing operations. Demand volatility is at the top of the pyramid here as an input to

emphasize its impact on the manufacturing function. Underneath, the balance between the two

metrics of service and cost a profitable manufacturing order here is the goal, and it

denotes the contribution of the manufacturing function to the overall goals of the end-to-end

supply chain.

Cycle Times:In the supply chain and supply management hierarchies, the middle tier is

referred to as "working capital," and the metrics contained in it relate to time. Here, the focus is

the overall cycle time of an order in production. This can represent how quickly a plant, a cluster

of plants with similar capabilities, or the manufacturing network can convert demand for

capacity and resources into a profitable demand response. They complement the top-tier

metrics and provide insight into manufacturing flexibility.

Manufacturing Excellence:The lower tier contains the metrics that reflect the detailed

operational activities, which result in the outcome at the top of the hierarchy. The metrics shown

are some of the most commonly used across multiple styles of manufacturing to depict the

stability of manufacturing (for example, overall equipment effectiveness [OEE]). These areprimarily metric categories that are made up of additional levels of submeasures.



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Figure 4. Level 3: The Hierarchy of Manufacturing Metrics

ManufacturingReliability

Cycle Times

ManufacturingExcellence

Req. RMto Site

RMInspect

StageTimes

FGInspect

FGRelease

AssetPerformance

ScheduleAdherence

RightFirstTime

RM, WIP +FG Inventory

AssetMeasures

ProductionCost DetailEvents

PerfectOrderDetail

SupplierPerformance

Operations Excellence

Assess

Diagnose

Correct

ManufacturingPerfect Order

Mfg. Cost

DemandVolatility

Cycle Times

RM = raw material; FG = finished goods; WIP = work in progress


The Hierarchy of Logistics Metrics

The Hierarchy of Logistics Metrics (see Figure 5; "Align Supply Chain and Logistics Performance

With the Hierarchy of Logistics Metrics") helps connect the performance of the logistics group with

the rest of the supply chain. The term "logistics," as used here, represents full logistics and

distribution management, including inbound and outbound transportation, warehousing and

distribution, international logistics, and network inventory holding costs.



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Figure 5. Level 3: The Hierarchy of Logistics Metrics

LeadTimeCycleTime

TransportationCosts

Asset CostsInventoryQuality

LaborEfficiency

andProductivity

DeliveryOperations

Effectiveness

FillQuality

AssetEfficiency

andProductivity

LogisticsCosts

WarehousingCosts

On-TimeDetails

QualityDetails

Inventory

Correct

Diagnose

Assess

Top LogisticsPerformance

OperationsDetail

Supply Chain

Planning

Accuracy

and

Effectiveness

Supply ChainAlignment

Timeliness Quality Cost

Perfect Order

Profitable Delivery to Service Expectations


The three tiers of the Hierarchy of Logistics Metrics are:

Supply Chain Alignment:The structure of this hierarchy is essentially similar to the other

functional hierarchies, but some differences in emphasis were required. The perfect order for

supply management and manufacturing reflects each function's ability to deliver service to the

next node in the supply chain. For logistics, the next node in the supply chain is the external

customer, and that is what the logistics function is measured by. However, delivering a perfect

order to the external customer is the end result of all the activity upstream in the supply chain,

not just the activity of the logistics group. Almost by definition, logistics is a service function

servicing both the customer and the business. As such, the ability of the logistics group to

deliver on its commitments is highly dependent on how well it is aligned with the rest of the

supply chain.

The supply chain processes upstream to logistics work primarily against a plan or estimate of

what demand will be. Logistics works on actual demand. It's at this junction that the fulfillment

of "actual" demand gets compared against what the rest of the supply chain "planned" for

demand. To reflect this reality, supply chain alignment is called out as the top tier of the

logistics hierarchy. The metrics associated with supply chain planning accuracy and

effectiveness include: (1) operation planning demand visibility and all the ensuing supply



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planning that occurs based on that; and (2) strategic planning supply network design

decisions, that is, where and how customers are serviced, where the plants and distributions

centers are located, and where materials and components are sourced. Incremental

improvements or deficiencies in these areas can have a dramatic impact on the ability of

logistics to deliver the perfect order to the customer as well as on the cost to do so.

Top Logistics Performance:Similar to the other hierarchies, the ultimate outcome of the

logistics function is to deliver profitable service. Consequently, at this level are the two metrics

that reflect logistics' need to maintain equilibrium between service and costs: the perfect order

metric, with its timeliness and quality components, next to the logistics cost metric.

Operations Detail:This tier contains the detailed metric categories needed to execute against

the goals at the top. All of the metrics within these operational metric categories roll up to one

of the foundational metric categories of timeliness, quality or cost. The metric categories here

represent the most commonly used measures in logistics. These metric categories aggregate

additional detailed submeasures that may be broken down into further levels such as business

unit or facility locations, for example.

These hierarchies provide a set of frameworks that companies can use as a starting point to

organize and implement their own metrics programs. However, implementing a successful metrics

program is about more than the metrics themselves. It also requires changes in tools, processes,

people and governance structures to be successful. The Gartner Recommended Reading section

below provides additional best practices, a Toolkit and case studies to help you on your

performance management journey.

Gartner Recommended ReadingSome documents may not be available as part of your current Gartner subscription.

"Toolkit: Building a Hierarchy of Supply Chain Metrics for Your Organization"

"Implement the Hierarchy of Supply Chain Metrics With a Performance Management Architecture"

"Best Practices in Defining Supply Chain Metrics"

"Best Practices in Supply Chain Measurement: Pfizer Rises to the Challenge"

"Setting Supply Chain Targets: What Does Good Look Like?"

"Five Steps to Best Practices in Supply Chain Benchmarking: From Numbers to Action"

"Retail Supply Chain Leaders Metrics Reflect Today's Multichannel Environment"

"The Hierarchy of Healthcare Supply Chain Metrics for IDNs"

"Product Launch Dashboards, Part 1: The Hierarchy of Product Metrics"



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Evidence

This document is based on ongoing primary research in the area of supply chain performance

management, and hundreds of inquiries on the topic over the past year.



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