KPIs: Improving Supply Chain Performance Management Northeast Supply Chain Conference and Exposition Framingham, MA September 19 – 21, 2004 Tim Dolan, C.P.M. Manager, New Product Support Global Procurement Organization The Gillette Company
The Gillette Company Overview
Key Performance Indicators – What Are They?
The Case for Measuring Indirect KPIs
Developing Indirect KPIs
Sample KPI Scorecard
Guidelines and Benefits
Founded in 1901 by King C. Gillette
World-Class Brands, Products, People
$9 Billion in Sales (2003)
Gillette - Recognized Brand Worldwide
32 Manufacturing Centers
Approximately 29,000 employees worldwide
4 primary Business Units
Blades & Razors
Innovative: 47% of Sales from Products less than 5 years old
What are Key Performance Indicators (KPIs)? KPIs are measurements of a supplier or service provider’s performance in key activity areas P rice D elivery Q uality Performance to schedule Total product cost Product reliability and consistency
KPIs have historically been used to measure direct material suppliers’ performance Price
Rejected and nonconforming
Process capability, data/samples
History of Indirect KPIs Jim Kilts’ “Circle of Doom”
Implement Strategic Sourcing (SSI)
KPIs sustain strategic sourcing savings Source: “Jim Kilts Is An Old-School Curmudgeon”, Fortune, December 30, 2002 Trade Practices Supply Chain Financial Practices
What is Indirect Spend?
Indirect spend is the sum of expenditures for goods or services that are not components of the end product or service delivered to a customer
The average indirect spend for Fortune 500-size companies is 50% of total spend Utilities/ Engineering Construction Consumer Products Aerospace, Defense, DoD and DoE Contracting Source: CAPS Critical Issues Report, September 2003 ($ Millions)
Spend for services accounts for more than half of a company’s indirect spend Purchase Spend as a Percentage of Total Purchase Spend Median spend = $434M Other: Accounting Facilities Legal Logistics Real Estate Temp Labor Travel Construction/Eng Total Source: Defining and Determining the “Services Spend” in Today’s Services Economy, CAPS, July 2003 Marketing IT Pro Services Indirect Goods 21% Services 33% Manufacturing Direct Material 51% Inventory
Participants in a recent CAPS survey expect indirect spend for services to increase Indirect Spend - Services ($ Millions) 5-yr CAGR = 5% Source: Services Purchases: Not Your Typical Grind, Inside Supply Management, September 2003 Note: Chart represents respondents’ median spend = Projected
Developing KPIs for Indirect Suppliers
Evaluation criteria for indirect suppliers can be grouped into three categories Definitions of Supplier Criteria Ultimate objective is to be able to quantifiably measure and compare individual supplier’s performance
How well does the supplier deliver on the terms, conditions and prices agreed to in the contract?
How well does a supplier satisfy our customers from a product or service quality perspective?
How cost competitive is the supplier from an industry perspective and from a historical perspective?
How well does the supplier continue to enhance the product/service, process or cost?
Contract Compliance Cost Competitiveness and Continuous Improvement Customer Satisfaction
Specific KPIs can be tailored to meet the needs of various suppliers Attributes Objective and subjective attributes are necessary for measuring indirect suppliers
Actual cost vs. budget
On time deliveries
Order and billing accuracy
Supplier vs Industry
Supplier vs Other Benchmark
Supplier Partnership Initiative
Cost Reduction Target
Contract Compliance Customer Satisfaction Cost Competitiveness and Continuous Improvement
Indirect KPIs can use a 1 to 5 scale to score KPIs and a weighting system which allows some flexibility, but keeps weights significant and relatively consistent
Indirect Supplier Evaluation Criteria
Standard Scores 5 = Superior – far exceeds expectations 4 = Exceeds expectations 3 = Meet expectations 2 = Does not meet expectations 1 = Needs improvement; significantly does not meet expectations Allowing flexibility with category weighting ensures that the KPI scorecard is tailored to meet the unique needs of the measured supplier Contract Compliance Customer Satisfaction 30-50% 20-30% 100% Cost Competitiveness and Continuous Improvement = 30-50%
Contract Compliance Attributes
Actual costs versus budget
Service level results
On time delivery
Order and billing accuracy
Contract compliance attributes mirror the supplier’s contractual commitments
While KPIs measured with objective data are the most reliable, it can be argued that they do not capture the entire picture in regards to supplier performance
Traditional KPI constraints:
Difficult to evaluate the interactions of supplier personnel with customers
Quality can only be measured in regards to damage or breakdown, and is difficult to measure for services
Strong traditional supplier KPI data does not necessarily indicate whether or not the customer is satisfied
Customer Satisfaction Surveys provide mechanism to help evaluate supplier performance
Customer Satisfaction Surveys capture the customer‘s opinions in regards to supplier performance.
I feel the supplier provides high quality goods and services.
I feel the supplier provides high value for the cost.
I would recommend this supplier to others.
When I have questions, this supplier responds in a timely manner.
If there is an issue, this supplier resolves the issue in a timely manner.
If there is an issue, this supplier resolves the issue to my satisfaction.
In my opinion, this supplier deserves recognition as a top supplier.
1: Strongly Disagree
5: Strongly Agree
Customer satisfaction surveys can be a primary determinant of customer satisfaction
A comprehensive supplier measurement system can mitigate customer satisfaction survey limitations
Customer satisfaction tends to be overwhelmed by bad experience, even if the bad experience was not the supplier‘s fault
Most recent experience is recalled; not overall supplier performance
Surveys tend to be subjective
A single negative response can skew results
Response rate tends to be low
Evaluate responses in relation to other KPI data. Conduct enough surveys to mitigate this effect
Adjust weighting for Customer Satisfaction Survey where commodity has a great deal of objective data
Utilize statistically significant sample size and possibly discard highest and lowest scores
Target key customers with vested interest and explain significance of KPI
Issues Mitigating Techniques
Cost Competitiveness and Continuous Improvement
Benchmarking establishes cost competitiveness
Supplier vs industry
Supplier vs other benchmark
Standard or target prices
“ Should” cost prices
“ Price paid” indices
Consumer Price Index (“CPI”)
Comparing supplier pricing against benchmarks assists in avoiding “price creep”
Cost Competitiveness and Continuous Improvement Guidelines
In addition to KPIs that measure cost versus competition and industry standards, continuous improvement, supplier process improvements and/or cost saving targets can be established
Define baseline spend that generates the savings target
Cost Saving Guidelines 5 = Superior – far exceeds expectations 6% or more 4 = Exceeds expectations 4 – 6% 3 = Meet expectations 2 – 4% 2 = Does not meet expectations 0 – 2% 1 = Significantly does not meet expectations 0%
Collecting the Data
Evaluate the costs/benefits of each data collection method available Data collection is the most difficult and time-consuming activity in the KPI process. However, it is integral to a successful KPI program. Unbiased company collected data electronically Data collected / tracked by supplier Recommended approach Cost to collect data
A wide range of sources can provide measurement data ERP Systems Supplier-provided reports Third-party data Industry benchmarks Customer Satisfaction Surveys Data Warehouse Attaching the data and documentation to the scorecard validates scoring and makes it possible for the supplier to take corrective action
The KPI Scorecard
Sample Scorecard - Temp Labor KPIs
An overall score is calculated and used to measure indirect suppliers’ performance