Supply Chain Metrics 5 - About the SCOR

By far the best-known and most detailed performance metrics are encompassed in the Supply Chain Operations Reference (SCOR) model, which was created in 1995 and has been continuously refined ever since. The SCOR model provides an industry-standard approach to analyze, design, and implement changes to improve performance throughout five integrated supply chain processes—plan, source, make, deliver, and return—spanning the full gamut from a supplier's supplier to a customer's customer and every point in between. The SCOR model is aligned with a company's operational strategy, material, work flows, and information flows.

As explained by Peter Bolstorff and Robert Rosenbaum in Supply Chain Excellence, a handbook on using the SCOR model, the five SCOR processes encompass the following measurable activities:

Plan: Assess supply resources; aggregate and prioritize demand requirements; plan inventory for distribution, production, and material requirements; and plan rough-cut capacity for all products and all channels.

Source: Obtain, receive, inspect, hold, issue, and authorize payment for raw materials and purchased finished goods.

Make: Request and receive material; manufacture and test product; package, hold, and/or release product.

Deliver: Execute order management processes; generate quotations; configure product; create and maintain a customer database; maintain a product/price database; manage accounts receivable, credits, collections, and invoicing; execute warehouse processes, including pick, pack, and configure; create customer-specific packaging/labeling; consolidate orders; ship products; manage transportation processes and import/ export; and verify performance.

Return: Defective, warranty, and excess return processing, including authorization, scheduling, inspection, transfer, warranty administration, receiving and verifying defective products, disposition, and replacement.

The SCOR model provides a supply chain scorecard (or SCORcard, if you will) that companies can use to set and manage supply chain performance targets across their organization. Given the increased attention and scrutiny Wall Street is applying to the supply chain's impact on a company's financial performance, being able to measure exactly how well each process is doing is one of the key steps on the road to developing a best-in-class supply chain. Therefore, one of the main roles of the SCOR model is to provide a consistent set of metrics a company can use to measure its performance over time as well as compare itself against competitors.

In the end, supply chain metrics have three main objectives, according to Shoshanah Cohen and Joseph Roussel, authors of Strategic Supply Chain Management

1. They must translate financial objectives and targets into effective measures of operational performance.

2. They must translate operational performance into more accurate predictions of future earnings or sales.

3. They must drive behavior within the supply chain organization that supports the overall business strategy.

Supply Chain Metrics 4 - Supply Chain Check-up

How do you know that you need help in the first place, though? Benchmark studies and process maps are both expensive and time-consuming, and many companies whose earnings put them well outside of the Fortune 1000 realize that their supply chains aren't all they ought to be, but they are still hesitant as to what to do about it. Consultant Mike Donovan of R. Michael Donovan & Company offers a relatively short but challenging checklist that provides a basic assessment of how healthy your supply chain might be. If you answer "no" to any of the following questions, or even worse, if you don't even know the answers to some of these questions, then the time to get serious about fixing your supply chain problems is right now:

Do your order fulfillment rates meet management's specific and measured customer service strategy?
Are your delivery lead times competitive and predictable?
Do all of your supply chain departments agree on which products are made-to-stock and which are made-to-order?
Do sales and manufacturing share equally in determining the mix and investment in inventory?
Are the appropriate calculations being used, rather than "rules of thumb," to establish the desired mix and levels?
Are management's inventory investment plan and customer service objectives being compared against the actual results that are achieved?
Are short-term forecast deviations being monitored and adjusted, and is long-term forecast accuracy continuously improving?
Is your inventory accuracy consistently above 98 percent?
Are you able to avoid carrying excess safety stock buffers?
Are your excess and obsolete inventories being measured, and are they less than 1 percent of total inventory?

Time for a Turnaround

Automaker Nissan Motors is a good example of a company that recognized it was in trouble and used strategic benchmarking to launch a complete corporate turnaround. David Morgan, president and CEO of consulting firm D.W. Morgan Company, points out that Nissan was one of the relatively few companies that sat out the boom years of the 1990s, charting instead a decade-long course of failed products and poor financial results. In the year 2000, Nissan decided enough was enough as it began an initiative aimed at achieving an 8 percent profit on each vehicle sold.

"Through data collected in its supplier benchmarking program, Nissan discovered that suppliers were consistently producing inferior products at higher than average prices. In effect, Nissan was giving away $2,000 on every car sold. Further, Nissan's distribution costs were the highest among automakers," Morgan explains.

Once it became aware of these problems, Nissan quickly responded by improving its supply base. "Today, Nissan employs sophisticated benchmarks for every partner doing business with them. Any partner that fails to meet established standards is notified of corrective action that needs to be taken," he notes.

It took more than just benchmarking to effect these changes, of course. For one thing, Nissan expanded its closely held supply base to include global component suppliers. It also embraced many of the same lean manufacturing and quality philosophies that fellow Japanese automaker Toyota had pioneered. As a result of all these initiatives, Nissan has become a benchmark for the automotive industry. As Morgan points out, since 2000, the company's stock price has nearly doubled, and in 2005, vehicle sales were up more than 10 percent. Not too bad for a company that had been written off as comatose at the turn of the millennium.

Part 5 coming soon....

Supply Chain Metrics 3 - What Makes a Supply Chain Leader?

Here's the good news: Whereas the Singhal/Hendricks study exposes the vulnerability of poorly managed supply chains, another study conducted by Accenture (in partnership with INSEAD and Stanford University) reveals that companies identified as supply chain leaders have a market cap up to 26 percentage points higher than the industry average. That begs the question: So what makes a supply chain leader, anyway?

That's where the statistical approach comes in. If you can measure the performance of your supply chain, then you'll be able to determine how close you are to being best-in-class. But how do you know exactly who is the best at supply chain management? When Fortune magazine identifies the top-performing companies in a given industry, it uses the straightforward standard of annual sales. When it comes to identifying the top supply chains, though, merely counting up dollars and cents won't get the job done. After all, a supply chain that is truly best-in-class will encompass numerous operations and processes that don't necessarily show up on a profit-and-loss sheet, such as planning and forecasting, procurement, transportation and logistics, warehousing and distribution, customer service, and other key factors in the overall supply chain equation.

Measure Satisfaction

Automaker Hyundai uses its parts distribution operation to build customer loyalty. The company's goal is to provide high levels of customer service while keeping its costs as low as possible. In this case, the customers are Hyundai dealers, and through dealer satisfaction surveys the company has learned that order fill rate is the number-one driver of satisfaction. "If needed parts are available, our dealers are happy," explains George Kurth, director of supply chain and logistics with Hyundai Motor America.

So to ensure that it's keeping its dealers happy while keeping its costs down, Hyundai measures the facing fill rate, which is the order fill rate from the warehouse assigned to the dealer. "If we can keep that fill rate very, very high, it's good for dealer satisfaction and it reduces transportation costs," Kurth notes. "Shipping from the assigned warehouse on our dedicated delivery route is cheap. We pay for the truck no matter how full it is. If the part is not available from the assigned warehouse, we have to ship from another warehouse via an expedited carrier. We can satisfy the dealer and get the part there on time, but the cost soars."

Hyundai's facing fill rate on orders is about 96 percent, which is considered good for the automotive industry. The automaker also measures the fill rate for its entire warehouse network, which is 98 percent, also a high score for automakers. Kurth isn't satisfied with that score, though, because "that still means that 2 percent of the time, I have to use premium transportation."

Transportation costs, however, are just part of the total supply chain cost, which also includes inventory and productivity costs. Hyundai monitors the amount of inventory it carries at any given time, with the understanding that best-in-class for the automotive industry is never going to equate well with the high-tech industry's goals. "We tend to carry a lot of parts inventory because our automobiles last several years," Kurth says. "In contrast, Dell has virtually no parts inventory because a six-month-old computer is obsolete."

To stay on top of current automotive industry trends, Hyundai belongs to an independent automotive and heavy equipment group that collects performance and cost metrics from member companies and provides benchmarking services.


Part 4 next....