2022-02-14 / Ahn Louise
Supply chain management is about ensuring that supply chains perform optimally. But what does “optimal” mean? There is no such thing as universal optimal performance. Performance on different parameters are often conflicting and trade-offs will have to be made.
Therefore, it is necessary to know the priorities of different performance targets, and these must be driven by the purpose of business. If high service level is vital, but cost is less important, that will drive another design of the supply chain than if cost is more important but stock-outs are accepted by customers.
This may be obvious, but we have probably all seen how one can lose sight of the big picture while chasing local KPI’s. Being reminded of the overall priorities can help ensure the right perspective.
Performance categories
I have found that a good way to talk about supply chain priorities is to use the 5 high level attributes of supply chain performance from the SCOR model (SCOR = Supply Chain Operations Reference):
- Reliability
- Responsiveness
- Agility
- Cost
- Asset Management
Reliability is the ability to deliver to customer expectations. Metrics are usually variants of service level.
Responsiveness is about speed. Lead time from order to delivery is the standard metric.
Agility is about flexibility. How fast is the supply chain able to adapt to changes in the market.
Cost is obviously the cost of operating the supply chain. This includes the cost of goods sold.
The Asset Management category is about returns on assets and capital. Examples of low level metrics are inventory turns and capacity utilisation.
An additional attribute?
These days, it could be considered to add an additional performance attribute should be included, namely sustainability. Supply chain operations have significant impact on environmental impact and some of the 17 sustainable development goals defined by the United Nations. These are not covered by the classic 5 attributes, but perhaps it is time for an update of the SCOR attributes…
Conflicting Goals
Some performance attributes support each other, while other attributes are inherently conflicting. For example good performance on responsiveness will to some extent usually mean that an organisation also has better basis for agility. However, if short lead-times are obtained using means that are highly customised to the current state, then agility performance might be very low.
A classic example of conflicting goals is in the triangle of inventory, capacity and lead time. If demand is variable (which is the case with varying degree in all supply chains), this must be managed by having either high inventory levels, excess capacity or longer lead-times to maintain a high service level.
Prioritising Performance
In my experience, it is vital that management has a shared understanding of the priorities. It is natural that different functions do not have the same focus on all attributes, but all functions must understand the overall priorities and how they contribute. Otherwise sub-optimisation will occur.
One way of achieving this common understanding which I have found to create a good conversation about priorities is the following exercise, which could be used in a management group for instance. First, everyone are asked to individually rank the performance categories. Then everyone’s rankings are revealed, and the management group discusses discrepancies and there is discussion on the reasons for the differing priorities. In the end the management group settles on what they believe is the “right” ranking of the performance categories.
If possible, it could be great to validate the ranking with customers and other stakeholders, and perhaps even quantify the priorities. As an example: How much more is a customer willing to pay for a standard lead time of 1 day compared to 3 or 5 days?
Impact on Supply Chain Design
The prioritisation of the performance attributes should guide how the supply chain is designed. If a high service level and short lead time is required, then high capacity utilisation cannot be expected and one must plan with excess capacity. If the life cycle of products is low, the capacity needs to be flexible in contrast to the situation where it is expected to produce the same model for several years (e.g. some of IKEA’s basic models which have remained the same through decades), where the capacity can be optimised for high efficiency through a high level of specialisation.
The specific performance metrics used to measure each attribute can differ depending on the characteristics of the supply chain as well as the capabilities of the organisation.
Note, that having prioritised the performance attributes does not mean that you should not work to improve lower priority categories. But when optimising on the lower priority categories it must be done in ways which do not compromise the performance on the high priority attributes (at least not more than at a level where the trade-off is acceptable).
References
“What is SCOR. A model for improving supply chain management” by Sarah K. White, CIO, 2021-08-13
Wikipedia on SCOR