The importance attached to a particular metric will determine the attention of the people working for the firm and thereby influence the performance against that measure. If everyone knows that you could lose a job because you shut down a manufacturing line, then these lines will keep running regardless of the raw material building up in front of the line. Purchasing will order enough of that material to make certain there is little to no chance of down time. The space necessary to hold that material, the carrying cost, and the slow turnover of the material become ignored factors as the primary requirement is met. “No one ever lost their job because of too much inven- tory” is a common statement made by early level firms when we question the amount of raw material and work-in-process inventories. “But we all remember when someone lost a job because a major line was stopped because we needed something that wasn’t there” is the quick second statement.
On the other hand, if you pay for customer satisfaction, you will get customer satisfaction. If you look at returns to find the reason for those returns, you will find the means to eliminate the root causes and the goods will stay with the satisfied customers. If you insist that deliveries are made within the time frame established by the customer, deliveries start to show up inside those schedules.
The problem arises when an organization brings focus to traditional measures for so long that they become a part of the culture. Any effort to move to new metrics that could have more meaning for a change effort is typically resisted, particularly if incentives and bonuses are still attached to the traditional measures. That is a condition that must be accepted as the
Mistake 2: Using the Wrong Metrics 29
firm moves out of Level 2 and into the advanced stages. Introductions to new metrics should be done on a patient but determined basis — usually best accomplished with a few new measures that shift the focus to the intended direction.
A typical first effort starts with a look at the direction in which analysis of flow occurs and how rewards are established. Most current measurement
and bonus systems, for example, make payoffs that favor a push system. The
company wants annual growth, so the leading metric is Net Sales. Sales personnel are compensated for the volume of orders, so they favor getting large orders, some of which contain profit and some that do not. The com- pany also wants high profits, so the most desirable customers from a profit perspective get the most attention and best service, while others may be neglected. Manufacturing personnel are paid for getting throughput in both cases. That throughput could go directly to the best customers or, more likely, into storage. Bonuses based on units produced are prevalent in industrial and consumer products companies, with the result that these industries have traditionally high inventories as a percent of sales.
These factors drive a firm to concentrate on high-volume runs that push the goods into inventory, whether the customers really need the goods or not. Once the system is working and these goods are moving toward cus- tomers, the company has no choice but to pay for the warehousing necessary to hold the goods, to absorb the carrying cost on goods not consumed, to accept the obsolescence cost for goods never used, and to make the emergency shipments for what was really needed but not available. It is a weak, tradi- tional system sorely in need of changing, and most supply chain efforts bring early attention to changing this focus.
The preferred focus is on a system that caters to the actual demand being created downstream in the supply chain — as close to actual end consump-
tion as possible. With this emphasis, the supply chain becomes a pull system,
which brings goods through the process steps in synchronization with what is being extracted. A basic premise of supply chain is that the system must match demand with supply and let consumption pull the necessary goods and services through the system. This system must bring focus to what the customer is consuming (demand), matched with available stocks (supply) in a way that the right goods are at the right place at the time of need.
In terms of metrics, the organization starts to focus on forecast accuracy, cycle times from order to delivery, out-of-stocks, late deliveries, and so forth, bringing attention to process steps related to the matching of demand and supply. Now inventories shrink closer to what is actually needed to satisfy demand, obsolescence decreases as the products most in demand
30 The Supply Chain Manager’s Problem-Solver
are favored in planning and manufacture, warehouse space and logistics costs go down as there is less need for storage, and better end-to-end coordination occurs.
Success comes to a supply chain effort for many reasons, but it will surely occur only if coordination and best practice are achieved across the full supply chain. But this requires enormous cooperation from internal constituents. In an end-to-end effort, all parties need access to the information relating to the product, information, and cash flows. As the constituents continue to focus on their small area of responsibility, achieving optimum conditions is elusive. Manufacturing cries out for better accuracy in forecasts, sales service responds to special customer needs by interrupting schedules, purchasing pressures suppliers to match their supplies with schedule needs, and logistics managers arrange the emergency shipments to keep customers happy. It becomes a merry game of ad hoc processing.
The problem begins inside the organization where the drive for optimi- zation, rewarded by traditional measures, can result in the deterioration of a metric important to the customer. As an example, consider what happened at one of the largest consumer goods companies in North America. This firm, with a stable full of established brands, became enamored with supply chain as a means of moving to the next level of performance improvement long before other industry members discovered the process. Unfortunately, they sustained the old measurement systems to drive performance with some unfortunate results.
The firm had traditionally rewarded manufacturing efficiency in spite of proclaiming that customer satisfaction was the more important determiner of performance. As supply chain took hold as a driving effort, attention went quickly to the area of logistics, a typical reaction for firms in Level 1. As improvements were made and costs lowered, this company decided to add a special bonus as it moved to Level 2 for achieving full truckloads before shipping case goods to customers. This seemed logical, as lowest cost condi- tions would occur if all trucks were fully utilized.
Since this measure drove performance, the practice caught on and trucks were held at loading docks or distribution centers until full load conditions were achieved. When the effort gained momentum and there were still trucks without full loads, the company elicited the help of other firms. They indi- cated to new allies that loads could be dropped off at a convenient cross- dock or the company’s truck would pick up loads to fill truck capacity. Since there were obvious savings for the cooperating companies, the idea again quickly gained acceptance and the consumer goods company’s full load con- ditions rose dramatically.
Mistake 2: Using the Wrong Metrics 31
The problem occurred when these trucks were held so long waiting for the final loading that delivery dates were missed at the customer site. Even- tually the problem became so bad customer complaints moved to loss of business as the customers simply changed sources, in spite of their desire to get the branded products. For the customer, meeting promises was far more important than the branded company’s name and internal performance. The push system had been enhanced for the consumer goods firm, but the pull system was languishing.
The lesson is basic to getting the desired supply chain performance. Before putting a new set of metrics in place, remember that measures will drive performance; so determine what the traditional culture will do to desired performance through established practices and measures. Antici- pate the needs and how important the customer is in determining good results. Then begin introducing new measures that will bring the desired new performance while expecting resistance of the move toward a pull system.