Real-time wisdom

How Ford, Flextronics, and others use KPIs to drive performance

Alex Anderson, Contributing Editor

Real supply chain gains come not from knowing the past, but from adapting to the present through the use of key performance indicators (KPIs) and exception handling techniques. That's not just a bold statement-it's an actual approach being taken by manufacturers from Ford to Flextronics. It's also a shift from the past, when managers juggled spreadsheets and reports from multiple transactional systems for clues to what the future might bring.

"To make decisions, you need hard facts about what's going on in your supply chain today...not last month's reports," says Roger Merckle. In January, Merckle retired as North American Inventory Planning Manager for Dearborn, Mich.-based vehicle manufacturer Ford Motor Co., but not before he arrived at a KPI-based solution for streamlining the replacement parts supply chain for Ford's customer service division.

Ford's redistribution centers make about 10,000 shipments each day to more than 3,000 dealerships, managing literally hundreds of thousands of different parts. Traditionally, the division was required to carry relatively high safety stock levels to accommodate high variability.

"We wanted to reduce the mean length of our supply chain [in terms of both time and process steps], and variability within the supply chain to enable us to reduce excess inventory within the Ford system and improve order fill rates," he says. "We also wanted to provide actionable data to the person who could use it to make a decision. In the past, decisions were being made too late. A supply chain analyst had to interpret data before anything could be done. We wanted information to go directly to the people doing the work."

To accomplish this, Ford selected an application from Irvine, Calif.-based SageTree. According to Merckle, the project has been an unqualified success. "From the pilot phase onward, we've been able to take about 12 days out of the supply chain while reducing the amount of inventory in the process," he says.

Additionally, the visibility, reporting, and analysis functions have enabled Ford to focus its process improvement efforts. "We've reduced our process time significantly, says Merckle. "Prior to implementing SageTree, we did things on the first in/first-out basis, but it didn't keep us ahead of the curve." Much of the forecasting was based on backorders, but you're already in trouble if the part is on backorder. Now we do things on a day-to-day basis. We're proactive.

"It's definitely changed the way we operate," Merckle continues. "Over the last year, we had record fill rates and the lowest inventory in our history. In the past, we put out fires, but now we are able to take action to prevent the fires from happening."

It's that kind of ability to take preventative action that vendors are saying is the next wave in performance management. KPIs will be used in the context of this emerging trend, even as end-user organizations face hurdles such as data integration and arriving at the right set of KPIs to use in their businesses.

Early warning systems

"Predictive analysis focuses on what can become a problem in the future. The whole idea is to give the enterprise the ability to rebalance the supply chain. The earlier they find out about a problem, the less expensive it is to fix it," says Jerry Hill, SageTree president and CEO.

The SageTree solution breaks the enterprise down in segments based on the touch-points that are created by internal data systems. "It could be a bar code scanner at a dock, an ERP [enterprise resources planning] system...all create data that documents and measures the inventory as it moves through the enterprise," says Hill. "At any point, you can enter a part number and find out where in the supply chain it is and where it's predicted to be. Then you can redirect or cross-stock as required."

Andy De, director of product marketing with i2 Technologies, a Dallas-based vendor of supply chain management software, is firmly on the predictive analysis bandwagon, believing the supply chain exception management view to be limited. He says that the future is a process i2 calls "adaptive planning," whereby managers can predict what kinds of exceptions they are going to see and make contingency plans. "Adaptive planning takes what you know about what is happening in the supply chain and use that information to react and make contingency plans to solve [potential problems]."

De provides an example of adaptive planning at work: "Say an alert comes in that a shipment to an important customer is late. Immediately, an emergency shipment is sent to the airport. A longer look shows that this isn't the first time this has happened and that shipments on Friday often are late from the same transport supplier. Tactically, I can alter the plan to ship that customer's product on Thursday. Strategically, I can replace that service provider with another."

Dave Busch, a vice president with Sunnyvale, Calif.-based performance management vendor Vigilance, agrees with this principle. "KPIs are indicators of the health of the business-but to manage it, you need to recognize the key performance events and determine appropriate responses."

According to Busch, the optimal way to track KPIs is in real time, transaction by transaction, rather than through a nightly or weekly feed. "Then you need to take this visibility to the next level and use it to facilitate strategic decision-making. Knowing what is going on is nice, but it doesn't do anything. You need to evaluate data and come up with an intelligent response," he says.

Beware of silo mentality

One of the greatest challenges companies face when measuring corporate performance is reconciling a departmental or site-driven perspective on KPIs with cross-functional, enterprisewide goals, says Larry Lapide, who runs the benchmarking group at Boston-based information technology (IT) analyst firm AMR Research.

"In many companies, metrics are broken up by department and system, with each unit using its own benchmarks," Lapide says. "That's not ideal. There is a set of cross-functional processes that you have to look at, but then you still have to be able to drill down. Traditionally, companies have done the low-level stuff, but haven't brought it up to the executive level."

One example of important cross-functional metrics is time-to-market-a process that spans the enterprise, from design to manufacturing, on to shipping, and finally billing. It has a direct impact on the customer experience, and thus, influences customer satisfaction.

Integration is therefore a core component of performance management tools. They have to be able to dig into each system, whether it be an ERP system, a supply chain solution, or a customer management application-as well as each department in the enterprise-to find the meaningful data and aggregate it in an easily digestible format. Increasingly, this is done via some kind of dashboard view.

When faced with the sudden market downturn, Singapore-based contract electronics manufacturer Flextronics decided to centralize procurement to maximize corporate buying power and drive down prices with larger enterprise orders. This introduced a critical challenge that had to be overcome: once you've negotiated a global contract with a strategic supplier, how do you make sure that each individual facility, which will be executing the contract, abides by it?

Flextronics deployed a performance measurement solution from SeeCommerce, a Palo Alto, Calif.-based vendor of supply chain performance management software, to monitor site procurement activity on a daily basis. The system takes a feed each day from almost 100 manufacturing sites, aggregates it, and sounds an alert whenever it finds non-compliant activity.

"We get daily reports and if we see one of the facilities made a buy that doesn't match the contract, we can call the specific purchasing manager almost immediately," says Dale Tate, finance director for Flextronics' Global Procurement Group. "There may be a good reason for non-compliance, but this allows us to highlight issues very quickly so we can go back and correct them on an immediate basis."

Flextronics has extended the use of KPI-based performance management across all facets of the organization, but materials management is a core competency. Having the kind of visibility into the operation and the control that goes with it is critical for a volatile business such as electronics manufacturing, says Tate.

While the recession has minimized shortages, Tate already is seeing signs that it is turning. "In some devices, there has been a four-time change since December. It's changing rapidly, and we expect that to continue. You need to be sure you are managing procurement closely-as demand ramps up, behaviors may be less than optimal. We need to understand what's going on, and make sure we are sourcing from the correct people at the correct price."

According to AMR's Lapide, the "responsive" nature of performance management software like that deployed by Ford and Flextronics provides a glimpse of the future of manufacturing. "Responsive software notifies a person or a system that attention is needed. Exception management is the first cut at responsive software, and it's only in the last couple of years that vendors have started writing responsive software," he says.

KPI as building block

At the heart of all these processes is the KPI. Not unlike the atom, the KPI is the building block of performance management.

"A KPI is a method by which an organization can measure itself and its success at meeting its key objectives," says Mike Monsbach, a SeeCommerce vice president. "You cannot improve what you cannot measure. The whole point of KPIs is to measure performance so you have a starting line from which to improve. It's a strategic as well as tactical imperative for companies to utilize KPIs to improve performance."

Usually these KPIs manifest in some form of an executive dashboard that tells managers how they are doing on a day-to-day basis-often boiling down to some kind of financial statement. When an exception-an event that violates defined optimal behavior-materializes, an alert is triggered, drawing attention to the problem so it can be analyzed and corrected.

"An indicator says, 'Hey, come look. There's something you need to know.' Then you need the tools to understand what that KPI is telling you, and what you can do to act on it," says Tom Westerlund, a vice president with Columbus, Ohio-based extended enterprise applications vendor FrontStep. "Instead of making a credit call on a late payment, an accounts receivable manager can drill down to the order and find out if there are any issues. Was the order late, justifying the late payment? It gets you to ask the right questions."

FrontStep partnered with Cognos, a business intelligence software vendor based in Ottawa, Canada, to deliver its scorecarding and dashboard visibility capabilities. "KPI's really help you make well-informed decisions," says Westerlund. "That's typically tough to do. The data can be locked up in disparate systems and by the time it's collected, aggregated in a useable format, and then presented, it's obsolete."

A common challenge for companies adopting performance management is identifying the specific KPIs they should be using. There are literally thousands of different metrics to choose from, but most processes can be narrowed down to a core group of about a dozen that are seen over and again. Says Monsbach, "More is not better when it comes to KPIs. You have to identify the right KPIs for your goals."

Tom Harwick, a research director with Cambridge, Mass.-based IT analyst firm Giga Information Group, concurs that users need to be selective. "You don't need 1,000 KPIs," he says. "You can't manage that. Managers need a short list of KPIs. Most managers will be content with two or three."

Harwick identifies some strategic KPIs common in the manufacturing industry: ·

• Customer order performance: what is the percentage of "perfect orders"-i.e., complete and on-time?
• Inventory turnover: this is a measure of asset intensity. ·
• Forecast accuracy: more accuracy here means less safety stock is required. ·
• Total supply chain cost as a percentage of total cost: this can be broken down to measure procurement and transportation costs.

Performance management opens up internal processes so you can see what is going on in the enterprise, understand it, and take corrective action. However, while visibility is a huge part of this approach, merely seeing what is going on is not the end-all, says Monsbach. "Performance management aggregates the benefits of all the functional areas up to a level that enables strategic decisions to achieve corporate goals. It gives you better visibility, thus control, over what's happening within your organization."

BI and beyond

While there is some debate over whether business intelligence (BI) tools based on data mart technology possess enough information currency and exception-handling mechanisms to deal with problems as they occur, there is little doubt that such tools support KPIs, and help organizations arrive at improved decision support. In fact, countless enterprises, including Montreal-based electrical equipment distributor Sonepar, benefit from business intelligence software.

Another company in a high-volume/low-margin business, Sonepar deployed a business intelligence package from Cognos to enhance visibility, and improve efficiency and query load demand off of its ERP system. Today, Sonepar's executives have better control over the company, says François Arbique, Sonepar's vice president of IT. "For example, the president of one of the operating divisions looks at three or four numbers at the beginning of each day and plans part of his day around them."

Overall, say observers, KPIs and performance management solutions help manufacturers shape the future. "Historically, organizations automated internal processes with constraint-based planning, a methodology that enabled 'what-if' planning," says Monsbach. "What was missing was the ability to look into the supply chain and see the 'what is.' If you know what is happening in real time, then you can react to changes as they occur and increase efficiency exponentially. This is the underlying promise of KPIs and performance management."

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