Earlier this year, I wrote about new research from the non-profit organization the Center for Global Enterprise (CGE) describing an important breakthrough in creating a truly Digital Supply Chain. At the time, I focused on how the right people in the right jobs can speed your progress towards a Digital Supply Chain, one that generates demand and revenue while reducing cost.
Now the Digital Supply Chain Institute (the research arm of CGE) has released very practical advice about how to make progress in this important area. Their message is simple: transform your performance measures and you will transform your supply chain.
Traditional supply chain metrics
Most companies measure supply chain performance by cost and quality. Cost is measured based on “inventory holding cost” and “inventory turns.” Quality is measured based on “perfect orders” and “demand forecast accuracy.” And there are even more measurements for “cycle times” and “capital assets.” These measures drive companies to lower cost and improve delivery performance with low cost manufacturing and logistics.
While this is all very important work, reducing cost and improving quality measures alone will not flip the supply chain management process to focus on the customer. Nor will these actions ensure that the Digital Supply Chain is a source of revenue growth and cost reduction. In fact, George Bailey, the Managing Director of the Digital Supply Chain Institute says, “running an efficient traditional supply chain will lead to loss of market share and revenue decline; and it is game over if a digital native company enters the market!” In order to remain relevant, Bailey insists businesses quickly embrace a new outlook and set of innovative metrics that better assess a company’s transition to digital.
Essential digital supply chain metrics
Many of the Traditional Supply Chain metrics that we use today will be just as important in the future. And we all know that we can get better at managing the systems, people and processes to improve performance against these metrics. However, some of the traditional measures will be dropped to make room for new, essential Digital Supply Chain metrics. Just adding more measures will not work. The answer is not to create a bigger scorecard with more metrics. As Anders Karlborg, the Assistant CEO for ZTE stated in the report “We don’t want to measure how good we are; we want to measure how good our customers think we are.”
The answer to the question of what metrics will shape our progress towards a true customer facing supply chain is determined by each company’s Digital Supply Chain strategy. It is important for every company to assess where they are, decide where they want to be, determine a time frame and then communicate the vision, strategy and metrics.
Mike Corbo, Chief Supply Chain Officer at Colgate-Palmolive understands the importance of getting this right when he says, “We have a culture that respects and works towards performance metrics. We take them seriously and so do our people.”
Focus on the right measurements
Per the report, there are two types of new measures that will help shape the Digital Supply Chain. The first is an output measure. Output measures reflect a direct impact on a financial statement. These measures capture the results of the work you do on the company’s financial success. For example, a metric that captures incremental revenue from supply chain actions would fall into this category. The second type of measure is a process measure. These record the progress made against process changes. For example, measuring the degree of automation in a firm is a process measure.
The basic rule is that you must have output measures to help you manage the impact of your actions on the company’s financial progress. AND, you must have process measures to keep track of the changes you are making to transform you company and become a truly Digital Supply Chain. Output measures without process measures are empty and process measures without output measures are blind.
Making it happen
Every company wants to create a Digital Supply Chain because the benefits are large. It will take a clear strategy to drive results. It will also take focused investment in technologies that capture real time big data, Artificial Intelligence, 3D manufacturing and others. And it will take accountability to deliver results. What is the best way to create accountability? Clear measures, goals and rewards. The best approach will be for a company to create the Digital Supply Chain strategy, select the metrics, make the investments, and link pay to progress.
As John Waite, VP Global Supply Chain of Micron states, “As defined by the customer, our business is all about precision, accuracy, and quality, and our metrics also have to be precise, accurate and of high quality.”
Learn more about the CGE research, the new Digital Supply Chain measures that were developed, and the progress that companies are making right here.