You Can't Manage What You Can't Measure': Maximizing Supply Chain Value

In the face of increasing complexity in global supply chains, more companies are realizing that supply chain management (SCM) is a mission-critical element, and no longer simply the domain of the warehouse manager or logistics director. But even as companies adopt SCM strategies in an effort to keep up, experts from Wharton and Boston Consulting Group (BCG) report that many still lag when it comes to measuring how well they are doing, and balancing the trade-offs involved in keeping service levels high and costs low.

"The major trends in business right now -- low-cost country sourcing, outsourcing, customization, globalization and more -- all create tremendous complexities in a supply chain," says Steve Matthesen, vice president and global leader for supply chain at BCG. "In most cases, however, companies have not changed how they manage this critical part of the business."

According to Matthesen, that's largely because most company executives don't have a supply chain background, and they tend to view the supply chain function as "a black box" that they don't understand or have limited visibility into. "CEOs feel that their supply chain costs too much and doesn't work very well. They're quick to ask, 'How hard can it be to get the products to the right place at the right time?' Well, it can be pretty hard," he says, citing three major factors that have dramatically increased the stress on supply chains:

Fragmenting customer needs, resulting in a broader selection of SKUs (stock keeping units) aimed at specific consumer segments, different price points, shorter product life-cycles, and less predictable demand patterns;

Increased cost pressures based on global competition and shareholder demands to reduce working capital;

A new level of complexity brought on by more complicated distribution models, increased outsourcing, and "new technologies that promise efficiency but can increase complexity."

While supply chains are getting more difficult to manage, the competitive environment means that most companies need to further reduce costs.  In such an environment, successful SCM "means getting better results with the same, or fewer, resources," according to Gerald P. Cachon, Wharton associate professor of operations and information management. "It's like squeezing more juice from a lemon, or maybe blood from a stone."

Knowing What to Measure

"You can't manage what you can't measure," says Morris A. Cohen, Wharton professor and Co-Director, Fishman-Davidson Center for Service and Operations Management. "And that's as true for supply chain management as it is for other parts of a business' operations."

He says that many SCM metrics, like inventory turnover, are already built into a typical accounting system. But some of the more sophisticated benchmarks, including measuring the level of customer satisfaction, take some work to develop.

And a key issue is simply knowing what to measure.

Matthesen agrees that the challenge is measuring the right things. "Most operations groups track a ton of metrics. The issue is whether they are tracking the letrics that will identify how they are meeting the strategic needs of the company and what is relevant to their customers."

"When I asked a major car manufacturer if it considered customer satisfaction levels, executives advised me that they measured their customer service by the fill rate of the vehicles they sent to dealers," relates Cohen. "Based on that, they said they had a high rate of customer satisfaction. But when I asked them to survey the ultimate customer, the buying public, they were shocked to find that consumers were not satisfied with the quality of the vehicles."

Cohen says, however, that more companies are beginning to realize that they need end-to-end visibility in their supply chain management efforts. "SCM is about more than just sensing and responding," he explains. "Companies need to anticipate demand, since it takes time to respond to demand-side changes. They're learning, but there's still plenty of room for improvement."

Matthesen notes there is an inherent trade-off in meeting that demand: "How much service level can I give my customers before everyone screams about what it costs?" he asks. "If I have a retail store, and I want to deliver every day instead of twice a week, that will cost me more money. It's all about service levels: how fast do I get you your product compared to when you want it, when you ordered it, when you need it. And what will it cost?"

But cost is only one lens, Matthesen argues. "The goal is to maximize overall value.  You want to have low costs, but first you need to have a strategy that will let you win in the marketplace.  Sometimes that strategy requires spending more cost to get a much higher margin."

To determine this, Matthesen says companies need to make sure they have a "crystal-clear view" of what their customer really wants -- what minimum service level is required to meet their needs, and what they will be willing to pay for superior service. Service level here includes all attributes of the supply chain as experienced by customers: in-stock rates, delivery time, product assortment, etc.

In general, higher performance means higher costs, Matthesen notes. "Your company needs to make sure those costs are justified."

While the concept of understanding what performance level customers want sounds simple, in practice it is not. Companies have two gaps, he says: a true understanding of their current performance, and a deep understanding of what their customers need -- and are prepared to pay for.

"Every company has metrics that track performance," he says. "The key question is whether these metrics really provide visibility to performance as viewed by the customer. For example, one company measured itself by the percentage of orders received that day that were successfully fulfilled on time. Their performance against this metric was very high (over 99%). However, they didn't track the time between a customer placing the order and receiving their goods. When measured this way, the performance was much lower than expected. The reason was that often orders were shipped from the wrong distribution center -- resulting in longer delivery times and higher freight costs." 

Measuring customer needs is perhaps even trickier, he notes. "How do you know whether you would lose business or gain business if you change your service level? In most cases, there isn't much hard data to work with. It's also hard to ask your customers, since they are likely to respond that they want higher service levels at lower costs.  You need to dive more deeply into how your customers think about your business and what role you play in their lives. [Companies] may also need to run some experiments in the field to validate their assessments."