Today we announced our free Supply Chain Performance Benchmarking service (more on that below), so it seems an apt time to discuss the issue of benchmarking.
I wrote a blog post recently about how to use supply chain KPI’s to assess, diagnose, and correct supply chain performance, and the importance of benchmarking against your competitors. In my blog I referred to a post by John Westerveld in which he comments on visibility titled “Visibility in the supply chain: What you can’t see can hurt you”, making the point that visibility and performance management are tightly linked.
It is always good to get validation of one’s ideas. Well, I listened to a webinar hosted by Supply Chain Standard in which the registrants were asked what visibility means to their organization. Most of the respondents replied that it was to obtain “End-to-End supply chain performance against key performance indicators”. A point made by Mawgan Wilkins of Cisco (Cisco is one of our customers) is that in today’s supply chain in which outsourced manufacturing is prevalent, most of this information does not exist in the organization, but rather external to the organization. Yet so much of your supply chain performance is dependent on how your contract manufacturers perform.If you don’t measure it you can’t manage it. Measuring performance is valuable in and of itself, but knowing how your performance compares with your competitors is crucial to determining where improvements are required. Not knowing how you compare against your competition is a “fool’s paradise”. There is no way to assess the health of your supply chain without knowing how you are doing against your competitors. Being able to track the KPI’s over time and see how they are trending against your competitors is crucial to both determining when negative or positive trends are developing, and in being able to drill to more detailed metrics in order to diagnose the cause.
Correcting the issue requires an even deeper dive into operational KPI’s. What I find interesting about the graph above is that the more operational aspects of visibility are given a lower priority. I think this an issue of supply chain process maturity. What I mean is that of course performance management is the most important aspect of visibility when you don’t have any visibility. However, I contend that once companies are able to measure supply chain performance, their instinct is to improve, or correct, their performance, which is where the other elements of the survey become more important: global view of inventory, consolidated view of demand, etc.
that uses publically available data extracted from the submission of financial statements. Clearly the KPI’s that we can generate based on the financial statements are focused on the "Assess" and "Diagnose" levels. The operational KPI’s required at the "Correct" level typically use data that is not available from financial statements. Since we focus on manufacturing industries, there is a graph available in the benchmarking service that compares companies on the elements of cash-to-cash (C2C) – days of sales outstanding (DSO), days of inventory (DOI), and days of purchasing outstanding (DPO) – and return on net assets (RONA). The C2C elements are represented by inventory turns and the ratio of DPO/DSO. Even though many companies have outsourced manufacturing RONA is still a good way of comparing companies on the presumption that a company that outsources a lot should have a higher RONA. In the graph below we are averaging these value over the past 4 quarters. As is usual with these types of graphs, top right is “good”, bottom left is “bad”, and big is better.
What is interesting is to compare how this changes over time. The graph below shows the values for the previous quarter.
To view how these values have changed over longer periods, a different graph can be used.
Yet a different graph can be used to drill down in to the C2C components in order to start the Diagnose phase. If we look at Eli Lilly as an example, clearly they should focus on inventory in order to reduce C2C. On the other hand it is quite clear that GlaxoSmithKline has been able to negotiate much more advantageous payment terms with their suppliers giving GSK a clear competitive advantage.
We would really appreciate your feedback, so please go to our supply chain expert community to try it out. In order to use the free benchmarking service, you will need to register as a community member. Once you have registered, click on “Benchmark my Company" from the menu bar on the left. When you click on the benchmarking service, you will be taken through the configuration of the benchmark groups of interest to you – Peers, Customers, and Suppliers are created for you by default – and select from the 30-odd KPI’s that are of specific interest to you.