Analysis & Commentary:

FORGING STRONGER LOGISTICS LINKS WITH SUPPLY CHAIN MGMT

For distribution, retail, and manufacturing companies, effective supply chain, management is one of the most critical aspects to ensuring a healthy bottom line, positively impacting cash flow and improving customer satisfaction. Mismanagement at a single point in a supply chain can translate into an empty space on the bank ledger for the duration of an entire sales cycle, as well as jeopardize relationships with valued customers who rely on a consistent influx of parts and products. Indeed, when logistics managers look to their shelves for the materials they need, they see dollars, not widgets.

Improving supply chain performance necessitates more than just avoiding the common pitfalls that plague order fulfillment. Effective logistics management requires focused attention on the strategy and performance dynamics behind the entire supply chain. Ensuring that day-to-day challenges are answered with enhanced strategic initiatives ultimately translates into greater profitability and increased market competitiveness. Since each company's supply chain demands are different, so are opportunities for improvement.

To this end, many companies are leveraging the data in their enterprise resource management applications by implementing customized logistics performance management applications. These enable logistics managers to derive strategic information from their transactional systems, gaining a broader insight into the processes and performance metrics behind their companies' unique supply chain management strategies.

According to a study conducted by global advisory firm KPMG and Northwestern University, companies that embrace business intelligence as a necessary adjunct to supply chain management will enjoy a distinct competitive advantage over companies that fail to measure the impact of point-and-shoot functions across the enterprise.

To meet this growing need, customer-focused distributors are implementing balanced scorecard applications to better manage their logistics management processes and enhance overall performance. By utilizing a logistics scorecard solution, companies are empowered to optimize supply chain initiatives while effectively maximizing company performance at all levels.

To better enable organizations to meet their unique business challenges, balanced scorecard and e-business intelligence software packages are being customized for the logistics vertical. These distribution-centric enterprise applications automate finance, order management, inventory management, purchasing, and electronic commerce analysis to streamline the supply chain. Customized supply chain management solutions enable organizations to effectively execute their distribution initiatives while accessing critical quantitative and qualitative performance information, enabling them to realize long-term goals.

Developed at the Harvard Business School, the balanced scorecard is a comprehensive, top-down view of organizational performance with a strong focus on vision and strategy. The balanced scorecard is founded upon the idea that financial measurements, while an important indicator of corporate performance, tend to be somewhat retrospective. In other words, financial metrics typically tell how an enterprise has performed, but give little indication as to how it will perform. A true balanced scorecard must include metrics that provide both historical and future insights. Thus, a scorecard must be comprised of both leading and lagging indicators. Leading indicators drive performance, whereas lagging indicators are actually results of past performance. For example, in a logistics analysis system, 'customer complaints' is a lagging indicator, while 'on-time delivery' is a leading indicator.

To achieve 'balance,' the methodology prescribes the strategic assessment of four perspectives: financial; customer; internal; and innovation and growth. The balanced scorecard forces supply chain managers to abandon the belief that traditional financial measures are sufficient for strategic logistics analysis. Instead of analyzing a group of loose-knit metrics, the balanced scorecard focuses enterprise analysis on four key areas:

• Financial -- Historically, this measure has been the cornerstone of performance measurement. The bottom-line is a good indicator of whether or not logistics strategy is being properly implemented and executed. Some traditional financial measures include operating income and return-on-capital-employed.
• Customer -- The customer perspective identifies the target customer and market segments for each business unit. Common indicators of customer performance include customer satisfaction and retention figures.
• Internal -- In Managing for Results, Peter F. Drucker, stresses the importance of having two types of products in the product line: today's breadwinners and tomorrow's breadwinners. Analysis of the internal perspective is key to differentiating which products fall under such categories. Product design, development and operations management propel a product line. With ever-changing markets, managers must milk today's cash cows and simultaneously discover tomorrow's stars. Internal performance management allows them to identify which products are to be harvested and which are to be discarded.
• Innovation and Growth -- In order to survive, the enterprise must reinvent itself to fit ever-evolving markets. Innovation and growth measures identify the infrastructure most appropriate to the firm. They are derived from human resources, organizational systems and procedures. Traditional learning and growth measures may encompass employee satisfaction, retention and skills; information systems performance; and organizational procedures' calibration with employee incentives.

To develop an effective logistics scorecard, management defines the organization's vision and goals. Next, while keeping organizational structure in mind, they must decide which logistics strategies will lead to successful goal attainment. These strategies are then translated into specific tactical performance-driving activities. Finally, metrics are established for each activity. These become the logistics performance measures. Once a vision, and subsequent strategy have been developed, the individual metrics -- or vital signs -- will fall out of that exercise quite naturally. Below is a list of sample metrics that logistics managers may select for each perspective, as they develop a balanced scorecard for supply chain and logistics.

Financial

• Average inventory dollar value
• Average labor cost
• Pick error dollar cost
• Ship error dollar cost
• Inventory accuracy percentage
• Warehouse labor cost
• Transportation costs

Customer

• New customer orders
• New customer order value
• New customer order backlog
• Vendor violations
• Order accuracy
• Perfect order completion
• On-time delivery index
• # of complaints

Internal Productivity

• Total pallet receipt time
• Putaways per hour
• Picks per hour
• Total cartons packed
• Shipments per hour

Transportation

• # of trucks in system
• # of trucks in transit
• # of trucks in lot
• # of trucks at dock
• Average truck turnaround time

Inventory

• Inventory accuracy %
• # of transactions by location
• Location errors
• Empty locations

Inventory Control

• # Cycle counts
• # Relocations
• # Consolidations
• Relocation backlog

Status

• # of products on hold
• Average length of time on hold
• Value of on-hold products
• # of products damaged
• # of problem reports

Outbound

• Total shipment cube
• Total shipment weight
• Total shipment quantity
• Pick list fill rate
• Line accuracy

Inbound

• Dock utilization
• # Pallet putaways
• # Open putaways
• # Case putaways
• # Case receipts per man hour
• Receipt volume - expected
• Receipt volume - backlog
• Staging volume

Innovation & Growth Human Resources

• Labor man hours
• Overtime hours
• Salary dollars
• Training costs
• Employee turnover

By translating supply chain performance objectives into tangible metrics and actionable decision support information, logistics scorecards refine strategic initiatives to deliver maximum profitability and increased market competitiveness. Enterprise supply chain management applications streamline inventory management functions, reduce transaction costs, enhance customer service, maximize their inventory investment and communicate effectively within the supply chain. This empowers logistics organizations to make more informed business solutions.

Omni Services Refines Supply Chain with Enterprise Logistics Management Omni Services, a leading specialty distributor of hydraulic and industrial hose equipment, uses logistics management applications to better manage inventory and evaluate accounting, sales performance, and product and purchasing trends.

"Our enterprise logistics management application allows us to tightly monitor and automate our inventory management functions while measuring and enhancing the effectiveness of our broader sales and purchasing initiatives," said Todd Keeney, manager of Information Systems, Omni Services Inc. "With key up-to-the-minute trend and performance information available at our fingertips, we can isolate trouble spots and take immediate steps to correct them."

"In addition to providing us with comprehensive 'big picture' performance analysis, our supply chain performance management application allows us to drill down into more granular detail to find out where we are running into problems on the supply chain, which products are selling, where and why. Now that we can quickly access the decision support information we need to make rapid business decisions, we can stay ahead of our competitors. This solution also ensures that we can keep our staff and customers appraised of valuable trend information and performance effectiveness, enhancing our internal communication and distinguishing Omni Services as a forward-looking, value-adding link on the supply chain."

CorVu Corporation is a global provider of enterprise business performance management, e-business intelligence and balanced scorecard solutions. Combining OLAP query and reporting, executive dashboard alerts and forecasting, CorVu's solutions offer information analysis capabilities that empower our customers to achieve strategic objectives and improve business performance. CorVu provides a comprehensive business performance management solution to over 3000 customers, including leading suppliers in manufacturing, telecommunications, insurance, financial services, banking, aerospace, transportation, healthcare and the public sector.