Research

Measuring success: New trends in global business bring supply chain management to center stage

New research shows world-class measurement systems for strategic sourcing and the supply chain help drive an organization's cost savings, revenue growth, new product development, supplier relationships, and shareholder value. What's the secret?

2005-05-06

Consider this: A food manufacturing company finds the perfect recipe for reaching 11-percent profit growth and 5 to 6-percent cost savings per year. A hand and power tool manufacturer nails its targets for improving year-over-year return on net assets. And a financial services provider tallies up savings goals of 5 to 7 percent of its annual spending.

Were these companies guided by the latest executive guru, or dosed with "magic business beans" as the companies in IBM's quirky commercials were? The reality, of course, is more mundane, but of increasing strategic importance for businesses.

These three companies achieved amplified success in their supply chains — and ultimately their organizations as a whole — thanks in large part to world-class purchasing/sourcing measurement systems, as shown in recent research headed by Philip Carter, a professor and executive director of CAPS: Center for Strategic Supply Research at the W. P. Carey School of Business.

Comprehensive measuring systems allowed each of these organizations to clearly set priorities for purchasing and strategic sourcing, comprehensively measure accomplishments, and effectively demonstrate the contribution of purchasing/strategic sourcing to the overall goals of the company.

Why measure?

Any executive worth his or her pinstripes these days knows that effective supply chain management has emerged as a crucial, strategic advantage for businesses. Though it hasn't always been so, the increase of global business and the surge of outsourced manufacturing have brought supply chain management to center stage.

Never before has purchasing and strategic sourcing been as top-of-mind for the executive suite. Indeed, some 44 percent of executives answered 'critical' or 'very important' to the question, 'How important is supply chain management to your company/industry?' in a recent survey of global executives by consulting firm Accenture. Corporations today also rely on outside suppliers more than ever, and consequently, need measurements to determine if their supplier relationships are effective.

But with greater importance, of course, comes greater scrutiny. Chief purchasing officers seeking to demonstrate to demanding CEOs the contribution of purchasing/supply to the overall success of the organization need hard data, notes Carter. "It is vitally important that companies use metrics to measure the performance of both the purchasing/supply activities within the company, and the performance of the supply base," says Carter. So how are corporations meeting this metrics challenge?

Carter's findings — gleaned from extensive research at 15 Fortune 500 organizations in a multitude of industries — show eight best practices prevalent among companies with world-class purchasing/supply measuring systems. To succeed, Carter says, these measuring systems should be:

• Aligned with other strategic business units within the company, and with overall corporate goals;
• Comprehensive; dynamic and aggressive;
• Communicated efficiently throughout the organization;
• Tied to performance-based initiatives;
• Backed by organizational resources;
• Supported by technology systems, and
• Championed by C-level executives.

Cost savings, naturally, is often the No.1 driver for companies implementing measuring systems, says Carter. And while improving margins is still a top issue for most CEOs, increasingly, companies are tapping into efficiency measures. These include dollars spent per employee in purchasing, number of suppliers per buyer, percentage of sourcing done through electronic sourcing systems, and number of suppliers being used, among others — for a clearer picture of purchasing/sourcing's effectiveness.

Strategic measures, while harder to quantify, are also getting their time in the sun. "These measurements can be subjective, but they are vital," says Carter. "CPOs need to know, 'Am I getting good ideas from my supply base? Am I impacting new product/new service development? Am I being proactive in bringing ideas from the supply base to my company? Am I impacting revenue generation?'"

Companies that look at cost, efficiency, and strategic measures together gain a greater understanding of their supply chain and its overall impact on the organization. But they are not common. "No more than 10 percent of Fortune 500 companies have what I would call a world-class system — one that scores high on all eight dimensions," says Carter. "Most companies employ some type of measurement system, but it falls off pretty quickly after world-class to companies only doing a little bit of this and a little bit of that.

"With poor measuring systems, organizations have difficulty making decisions and allocating resources," he continues. "How can you gauge how many people you need to add to a department, for example, if you are not tracking the efficiency of that department? Without a good set of measures you are flying by the seat of your pants."

It's not a lack of caring by these companies with sub-par measuring systems, Carter is quick to point out; rather it is a lack of available resources — financial and/or technological — that is the main culprit. Such measuring systems can be cumbersome, time-consuming, and expensive to develop and maintain.

Balancing the score

Companies can still reap significant benefits from improved measurement systems if they do not have the same resources to devote to metrics as world-class organizations. The key is measuring the correct components and ensuring the measurements get funneled up to a strategic level, Carter explains. "In order to achieve goals such as increased cost savings or timely new product development, purchasing/supply must work closely with strategic business units in setting critical measures," he says.

One way to do this is by utilizing a "balanced scorecard," says Carter. Originally formulated by Harvard University researchers, the balanced scorecard embraces the idea that measures need to be holistic; they need to be about more than just financials. Adapted to the supply chain, the thinking goes as follows: taking a company's strategic objectives, functional activities, and processes into consideration yields a more robust picture of supply chain health than merely looking at cost savings. ("Hallelujah," says the chorus of CPOs who have been hammered on price for more years than they care to remember.)

The balanced scorecard has four general themes guiding measurements for purchasing/supply departments, based on the company's overall strategic initiatives. One semiconductor company Carter researched, for example, uses finance, customer satisfaction, operational excellence, and innovation as its four key areas.

Within those quadrants, employees are measured on key performance indicators: cost per case by product platform and market price vs. contract price (financial); number of defect-free shipments received (external customer service); management of strategic vendor relationships and improving use of raw materials (operational excellence); and meeting product launch milestones and percentage of sales volume achieved from new products (innovation). "The balanced scorecard is one efficient method, but many approaches can work," explains Carter. "Whatever fits and feels right for the organization."

Again, the idea is to ensure the measuring system supports both the strategic goals of the organization, and its quest for increased revenue and shareholder return.

What lies ahead

Going forward, Carter believes the importance of efficient measurement systems will increase. Improvements in technology will enhance current systems, improve workflow and data sharing, and cut down on the time it takes to produce the measurements.

"The next phase is Web technology allowing companies to access the right tools and see the metric information in a more comprehensive way," says Carter, who also expects an increase in Web portals, used internally as well as between companies and their supply base. "Web portals are a better way of collecting information. They help establish standards and data definition models for supply/purchasing measurements," he says.

Also driving the popularity of measurement systems is the Sarbanes-Oxley financial reporting regulations. In the post-Enron era, financial data is picked over with a fine-tooth comb, and having available current and historical data on numbers is fast becoming a must. "With Sarbanes-Oxley, companies need to have transparency in their processes, they need to have controls built in," says Carter. "Measures are a central part of that. Without them, companies are open to all kinds of liabilities."

But can all this measuring occasionally get in the way of the actual work that needs to be done? Are purchasing managers losing sight of corporate goals in the face of increased pressure to produce metrics? If the semiconductor company, for example, spends a disproportionate amount of time rating how quickly it gets components from suppliers and manufactures at a low cost, does it eventually get in the way of delivering on those promises?

The key is moderation, says Carter. With lean staffs the norm at most companies now, extensive measurement systems can be a burden on the work force.

Over-extensive measuring systems can sometimes skew what companies focus on and frustrate or confuse employees about where priorities lie. "Companies have to be careful they can get lost in the forest of measures," says Carter. Setting and communicating clear priorities is imperative. "The pros outweigh the cons overall, but there is a sweet spot companies have to shoot for in terms of how much measuring makes sense," he says.

Magic business beans this may not be, but certainly pearls of wisdom for any company seeking greater efficiency in its supply chain through a comprehensive measurement system.

Supply Chain Faculty Management