Measuring performance has evolved from a broad corporate goal to a data-driven science, beginning with the rise of IT tools and corporate reporting systems in the last two decades. Executives and managers were overjoyed at the huge volume of information they could suddenly access, but this proved to be a dual-edged sword because now they had more performance data than they knew what to do with.While the performance of virtually every corporate process was suddenly revealed at a very detailed level, most executives had little idea how to interpret the data, or link it to the top-level strategy.
In response, a new group of reporting businesses emerged, promising to help executives make sense of their enormous volume of information. Spreadsheets that simply reported data were replaced with new analysis tools that sliced and diced this information, creating the new field of business analytics. Soon, most companies were using a reporting solution that enabled them to analyze their financial data at a very minute level, revealing performance problems affecting the bottom line. As these reporting tools became more sophisticated, they also enabled companies to isolate and analyze important
aspects of performance, such as cash-to-cash cycle time, providing true insight that executives could use to improve key metrics. Simple reporting was transformed into business intelligence, as the focus shifted to operational analytics: using analytical data to create and track processspecific improvement plans and goals. In a short time, virtually every business had a corporate performance management (CPM) effort in place, supported by dashboards and scorecards that tracked key business metrics such as product quality, inventory levels and delivery times.
Today, packaged CPM solutions and in-house efforts have created real financial benefits. But the majority of CPM initiatives have one critical shortcoming: they focus on top-level strategies revolving around financials, budgeting and forecasting, but fail to address how these strategies can be transformed into specific operational initiatives.
Extending CPM across the supply chain
For CPM efforts to deliver maximum return on investment, they must go beyond identifying problems at a high level and drill down through individual product lines to the shop floor, where meaningful changes can be made in everyday processes. A new discipline, called supply chain performance management (SCPM), offers a structured way for businesses to identify and address performance issues at various levels of the business, as well as across the value chain. SCPM enables executives and managers to more effectively analyze and improve the impact of individual processes, both within and beyond the company's boundaries. It's aimed at providing operational information and insights across the global supply chain, both horizontally and vertically.
While CPM focuses on strategic financial goals and high-level decision making, the growing field of SCPM enables top-level decisions and measurements to be propagated throughout the supply chain hierarchy. Executives can now improve their ability to determine the success of corporate strategies that are enacted at the operations level, and how well strategic goals are aligned with tactical and operational goals. For example, a common CPM goal is to increase profit margins. SCPM focuses on understanding, at a very detailed level, why margins are low today--and what specific operational changes and initiatives can lead to significant improvements.
Because of the maturity of financial standards and corporate governance practices, CPM solutions have proven fairly easy to package and to duplicate. However, because of the incredibly complex way in which most companies source, manufacture and deliver products and services, SCPM methods and solutions are much more difficult to standardize. There will always be variations among supply chains, but the discipline of SCPM is based on developing and applying a set of standard processes and measures aimed at analyzing the complete value chain--and ensuring that it both reflects and enacts the corporate strategy.
How SCPM works
SCPM is based on the concept of measuring and managing performance at every level of the business, using standards such as the Supply-Chain Operations Referencemodel (SCOR®), Six Sigma and Total Quality Management, and tools like dashboards and scorecards. To prevent misalignment, it is critical that metrics and standards are first applied at the highest levels of the business, and then cascaded down through the tactical and operational levels. This ensures that both corporate performance and supply chain performance will be assessed for improvement and that, ultimately, they will be closely aligned.
For example, a business may define an overall corporate goal of maximizing cash flow by increasing sales revenues while simultaneously decreasing operating expenses. Every function and process within the company must be aligned with this top-level goal in order to achieve it.
However, close examination may reveal a number of disconnects within the business. Sales compensation may be based on bookings--but salespeople should also be measured on achieving cash-collection goals. Operations managers may be rewarded for managing at full capacity, when they should be striving to maximize inventory turns. Functional targets and rewards should always support the larger corporate strategy, but in reality they may actually work against it.
One way in which SCPM helps to align and manage the supply chain is through independent industry benchmarking. But SCPM demands much more extensive and in-depth benchmarking than most companies have ever undertaken.Not only must executives study the best practices of industry leaders and key competitors at the top levels of the business, but they must also understand the intricacies of these companies' supply chains. This enables executives to understand the "as is" situation of their own business, as well as to create an ambitious, but achievable, plan for the future.
Functional targets and rewards should always support the larger corporate strategy, but in reality they may actually work against it.
When an overall supply chain plan has been created, the SCPM effort next turns to defining the specific process improvements that will support both operations goals and the long-term strategy for the business. These improvements are measured and managed through the use of highly customized dashboards and scorecards that keep supply chain performance enhancements on track and ensure a continuous cycle of improvement.
SCPM not only enables businesses to analyze what is happening now and what has happened in the past, but also what is forecasted to happen in the future, through the creation of forward-looking plan data. Powerful scorecards, dashboards and analytical reports allow supply chain decision-makers to test multiple "what-if " scenarios and predict the impact of their decisions. For instance, a business with a customer service level of 80 percent might be considering a new goal of 90 percent. SCPM tools enable managers to assess the actual operations costs of reaching this goal, which might not support long-term profitability. Managers may determine that an 85 percent customer service level represents the best possible cost and profit outcome, while still supporting the company's top-level market strategies.
SCPM dashboards and scorecards take the concept of plan-do-check-act to a new level, because they reflect a top-down model in which the overall corporate strategy is always considered first. They stand in sharp contrast to typical operations scorecards and dashboards, which are based on achieving discrete process improvements that may be disconnected from--and incompatible with--the highest-level goals of the organization.
For example, i2 recently worked with a high-tech manufacturer that had spent two years and $2 million custom-building a set of 20 in-house reporting systems that focused on discrete performance improvements, such as increased forecast accuracy. Not only was the initial cost staggering, but the business was also investing more than $1 million annually in maintenance costs. This investment might have been justified if the reporting systems had been aligned with top-level goals, but they were narrowly focused on bottom-up operational improvements--and completely disconnected from one another. i2 was able to replace these 20 in-house reporting systems with its holistic performance manager solution, capable of aligning the entire organization with the highest corporate goals. This represented a tremendous advantage in supply chain alignment and performance, as well as a significant "buy versus build" cost benefit.
The challenge of implementing SCPM
There is little doubt that undertaking an SCPM initiative that supports the broader CPM effort makes sense forevery business. But understanding and applying the concepts of SCPM represent an enormous undertaking.
Part of the challenge lies in the fact that the discipline of SCPM is still in its infancy. Packaged solutions are not yet available and will be difficult to develop because of the complexity of global supply chains and the variations among individual businesses. In addition, while this article describes a recommended approach for applying SCPM concepts that is based on i2's more than 100 supply chain analytics implementations, there is no universal process for extending SCPM across the value chain.
A huge hurdle for the typical business is developing and applying a robust set of metrics to create an accurate view of current corporate and supply chain performance, both within the company and across the industry. Supply chain leaders such as i2 have access to deep libraries of key performance indicators and industry benchmarks at both the strategic and the operational levels. i2 can also help customers understand which metrics and benchmarks are relevant to their own competitive challenges, a major shortcoming with models such as SCOR, which can overwhelm executives with hundreds of metrics that may or may not apply to their own business situation.
These are significant challenges, but there is an even larger one. Successfully applying SCPM concepts requires the right combination of skills and expertise among those charged with the implementation.
An implementation team must include strategists who have an extremely high-level perspective and who are capable of understanding the position of the business within its industry, the products and processes of chief competitors, and the key trends impacting the competitive landscape. SCPM requires the participation of supply chain domain experts who are capable of using a top-down approach to align the company's overall goals with specific operations initiatives. These specialists must not only have in-depth process knowledge, but also a broad view that considers the supply chain models and best practices of others in the industry. In addition, the SCPM team must include technology experts who can work with the supply chain experts to bring improvements to life through the application of the best possible technology solutions.
Few companies have the right combination of in-house expertise to successfully create and implement an SCPM effort, and it is probably not cost-effective or practical for most companies to hire such a diverse group of professionals as full-time employees. The obvious answer is to form a partnership with a supply chain leader that offers this highly specialized experience and expertise. For those unwilling to look beyond their own businesses for support in creating and implementing SCPM initiatives, this incredibly powerful new discipline will remain out of reach--and existing CPM efforts will be destined to fall short of their true potential.
by Alok Pathak and Kenny Li
