Quarterly discussions of high-technology industry best practices.

PRTM is recognized internationally as the leading management consulting firm to high-technology companies.
Reprint 10528 Volume 8 Number 2

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Optimizing Supply-Chain Performance

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A Fact-Based Management Approach

ased on hundreds of successful implementations with high-technology companies around the world, PRTM has learned that fact-based management helps separate market leaders from followers in supply-chain performance. PRTM characterizes fact-based management as a (process) management approach which utilizes performance measures that: are directly tied to business objectives; address both functional and cross-functional processes; are clearly defined and consistently measured; are readily accessible and regularly communicated across the organization.

How to Recognize the Need for Fact-Based Management

Several indications of underperforming supply-chain operations are directly attributable to a lack of fact-based management. How does end-to-end supply-chain management impact the companys bottom line? Very often, the supply-chain operations of Plan, Source, Make, and Deliver are so fragmented that they are viewed as necessary means to an end, rather than a source of competitive advantage. Without a coherent set of supply-chain metrics and an external point of reference, managers have no basis on which to question the status quo or to understand how their local efforts influence the companys overall operations performance. Have multiple supply-chain improvement projects been initiated (at either the business unit or corporate level) with

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few demonstrating lasting results and many showing no improvement at all? Without an understanding of the key drivers of overall supply-chain performance, certain improvement projects are doomed from the start because they do not focus on the right process issue. For example, excess inventory can result from poor planning, poorly timed product introduction, long supplier lead-times, or inadequate material quality. Solutions and implementation approaches will differ depending on which of these factors is the major driver behind inventory performance. Is there a process for allocating the companys scarce resources across operations improvement programs? Is an effort being made to understand and communicate the relationships between the scope and objectives of various projects? Very often, there are 20 to 30 supply-chain related improvement projects underway at any one time in a given organization. Rarely do companies align projects on a quantitative basis to ensure a maximum return from their total investment in people, time, and capital. In addition, divisional or business unit goals, such as inventory, manufacturing costs, and logistics costs, are not reconciled to project targets.

A Foundation for World-Class Supply-Chain Performance

The complexities of supply-chain integration and the slow progress experienced by many companies seeking supply-chain improvements highlight the importance of fact-based management efforts. Best practice companies share several common attributes: The supply chain and its core management processes are clearly and consistently defined. Within any global company, several different supply-chain configurations are operating simultaneously, tuned to market requirements, and supported by operational capabilities. Variations will be based on such factors as lead-time, make-to-order versus make-to-stock order fulfillment, process versus discrete manufacturing, and specific distribution requirements. To achieve world-class performance, best-in-class companies have sought universal process definitions at a level of detail which thereafter allows for the consistent measurement of supply-chain performance across entities.

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Metrics are aligned to highlight cross-functional process performance. Top performing companies have not only identified key cross-functional metrics but have also implemented them to motivate improved cross-functional behavior. Order fulfillment cycle time is one example of a popular cross-functional metric. It ties together order management, inventory management, and distribution and can also include manufacturing, engineering, and finance. The components of order fulfillment cycle time clearly define each functions contribution to the overall goal of improved customer order service, while focusing all involved on the only meaningful value that countsthe customer perceived lead-time. Fact-based management is internalized and viewed as part of the operational culture. Leading companies have recognized that management by fact, rather than opinion, minimizes the non-value-added time typically consumed by inter-organizational squabbling or finger-pointing. Where overall operations improvement is the goal, managers are rewarded for fact-based analyses and logic, and their efforts are evaluated by consistent, fact-based metrics.

An Approach to Implementing Fact-Based Management

Superior supply-chain performance can be achieved through a fact-based approach to supply-chain integration. There are three key steps that leading companies follow to implement fact-based management within their supplychain processes: Benchmarking To prepare for benchmarking, an organization must understand each of the process elements that define its supply chain, identifying the metrics that will characterize the performance of each process, and the interfaces among processes. The performance of these process elements must be objectively evaluated in comparison with external points of reference, such as competitors or customers. A company must thoroughly review benchmark results to identify and prioritize performance gaps. This analysis should yield a value proposition, with which a company can assess the potential measurable value in closing the gap between current and target performance. Project Selection and Implementation The selection and priority of specific improvement programs should be determined by comparing the value propositions of each proposed initiative and assessing each projects alignment with the companys strategic business objectives. This may also mean evaluating existing projects and realigning or canceling them as needed. Successful implementation of new and improved processes is first achieved when measurable benefits have been attained in a pilot environment. To realize maximum value, management should roll-out successful pilot processes to other pertinent areas of the organization.

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Realignment of Measurement and Reward Systems Using a fact-based approach to ensure continuously improving supply-chain performance, management must align the organizations measurement and reward systems with business and operational goals. If increased on-time delivery is a key business goal, and it is most significantly influenced by order fulfillment cycle times, the rewards and incentives for all participants should be tied to on-time delivery. There may then be specific incentives for cycletime reduction tied to those parts of the organization which can control the cycle-time performance of key order fulfillment process elements.

Implementation Challenges
Management faces several challenges in successfully adopting a more fact-based approach. The alignment of new cross-functional metrics with existing reports, incentives, and budgets is challenging and will meet resistance. Management leadership and widespread education are critical factors in overcoming such resistance. There is often a push to immediately implement a complete set of metrics. Rapidly implementing a few key metrics with a common theme, such as cycle time, sets the direction and immediately begins transforming organizational focus and behavior. As organizational acceptance builds, the scope of the metrics set can be expanded. Fact-based management requires a significant amount of quantitative data. Business unit and project management need to align information requirements with available and planned systems resources, integrating process needs with Information Systems long-term plans. No organization should implement cross-functional metrics in a functional environment and expect to achieve world-class performance. If the organizations thinking or reward system is functional, cross-functional metrics may have little effect. Top management will need to establish appropriate organizational linkages as a foundation for the management of cross-functional processes. This article was reprinted from INSIGHT, PRTM's quarterly journal on high-technology best practices.

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