Supply Chain Strategy: How to Build a Strategy-Driven KPI Dashboard
Supply chain management is all about balancing the Supply Chain Triangle of service, cash and cost.
However, in many organizations reporting is only focused on the On-Time-In-Full (OTIF) service level, without reporting on inventories (cash) and cost. This is problematic since only an improvement on the three dimensions ar the same time guarantees an improved Return on Capital Employed (ROCE).
But which metrics should companies apply in order to ensure the best shareholder value? The answer lies in building a KPI dashboard around the Supply Chain Triangle.
A dashboard that gives a complete overview at a single glance, and thus a perfect tool to use during Sales & Operations Planning (S&OP) meetings, should consist of three layers:
- Process metrics which function as diagnostic metrics
- Metrics for the different sides of the Supply Chain Triangle
- Result metrics
Fig. 1: The three layers of the KPI dashboard
Capturing Supply Chain Triangle Metrics
Important to remember is that the balance of the different sides of the triangle depends greatly on the company’s strategy. Based on the model developed by Treacy & Wiersema, we assume three different strategies, namely to focus on product leadership, customer intimacy or operational excellence (focusing on low costs). The strategic focus has a significant impact on supply chain decisions. For example, a leader in customer intimacy will have a broader product range, which leads to higher inventories and a higher cost position.
For translating the service, cash and cost side into metrics (see Fig. 2) we use value metrics (e.g. OTIF), cost metrics (e.g. cost of goods sold) and capital employed metrics (e.g. inventory turns). To reflect the service side, we use the model developed by Crawford & Mathews, who maintain that companies’ value propositions are typically based on five dimensions: access, experience, price, product and service. Two extra dimensions can be added by splitting up access and product into ‘physical access’, ‘psychological access’, ‘product breadth’ and ‘product quality/depth’. The outcome of the value metrics reflects in the typical top-line parameters such as net sales, gross sales or growth.
Fig. 2: Layer 1 and 2 of the KPI dashboard - top-line, bottom-line and return metrics
If we combine the top-line and the costs, we get the so-called ‘bottom-line’. Different strategies lead to different levels of complexity and to different levels of cost. A product leader will have a higher cost than an operational excellence player, but still will have a higher EBIT. As its products are unique, the product leader can drive superior prices and EBIT from niches that benefit the latest specification.
Looking at the Business Results
If we combine the bottom-line with what is invested, we get the return metrics. A good metric to use is the ROCE, which equals the EBIT over the capital employed (including working capital and fixed assets). Some companies also look at alternatives such as the ROA (Return On Assets) and the ROE (Return On Equity).
Adding a Proactive View
The main issue with the above-mentioned metrics is that they are reactive metrics: we can only observe them after the fact. To include a proactive dimension, it’s necessary to add a third layer to the KPI dashboard, one with process metrics. Those metrics will tell organizations upfront where the net sales will be going, or what will happen to the direct material cost. Some examples of those metrics: the number of new product introductions, the number of order lines, the cycle time, the number of order pickings, etc.
Translating into Practice
Of course, during an S&OP meeting, it’s handy to have a nice, visual overview of the key metrics. The theoretical dashboard model can be quite easily translated into an iPad dashboard that gives a complete overview at once.
Fig. 3: Example of an iPad dashboard for a product leader
Thus the impact of the chosen strategy and of the corresponding metrics can be made clear immediately. Undoubtedly, this will help to steer the decisions in a way that conduces to the company’s success.