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
Agenda
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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
Gillette History
• Founded in 1901 by King C. Gillette
• Boston, Massachusetts
World-Class Brands, Products, People
• $9 Billion in Sales (2003)
• Multinational Corporation
• Gillette - Recognized Brand Worldwide
• 32 Manufacturing Centers
– 15 Countries
– 200+ Markets
• Approximately 29,000 employees worldwide
• 4 primary Business Units
– Grooming
• Blades & Razors
• Personal Care
– Batteries
– Oral Care
– Appliances
• Innovative: 47% of Sales from Products less than 5 years old
Gillette Products
What are Key Performance Indicators (KPIs)?
Price
Delivery
Quality
Total product cost
Performance to
schedule
Product reliability
and consistency
KPIs are measurements of a supplier or service provider’s
performance in key activity areas
KPIs have historically been used to measure direct
material suppliers’ performance
Price
• Cost reductions
• Cost competitiveness
Delivery
• Quantity
• On-time delivery
• Paperwork
• Shipment condition
Quality
• Rejected and nonconforming
• Process capability, data/samples
History of Indirect KPIs
Jim Kilts’
“Circle of Doom”
• Centralize procurement
Supply
Chain
• Implement Strategic Sourcing
(SSI)
Trade
Practices
Financial
Practices
Source: “Jim Kilts Is An Old-School Curmudgeon”, Fortune, December 30, 2002
KPIs sustain strategic sourcing
savings
What is Indirect Spend?
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Computer/Telecom
Energy/Utilities
Printing/Marketing/Advertising
Employee Benefits
Office Products
MRO
•
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•
•
•
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Travel
Facilities
Professional Services
Fleet
Logistics
Capital Equipment
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
Direct
$700
$600
$500
$400
$300
$200
$100
$0
($ Millions)
Group Total
Indirect
General
Consumer Chemical/Petroleum Aerospace,
Utilities/
Defense, DoD
Engineering Manufacturing & Products
Mining
and DoE
Construction
Contracting
Source: CAPS Critical Issues Report, September 2003
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 = $434M
Total
Indirect
Goods
21%
Services
33%
5%
5%
6%
8%
8%
Construction/Eng
Inventory
20%
Manufacturing
48%
Other:
Accounting
Facilities
Legal
Logistics
Real Estate
Temp Labor
Travel
Direct
Material
51%
Source: Defining and Determining the “Services Spend” in Today’s Services Economy, CAPS, July 2003
Marketing
IT
Pro Services
Participants in a recent CAPS survey expect indirect
spend for services to increase
Indirect Spend - Services
($ Millions)
$434
2002
= Projected
5-yr CAGR = 5%
$456
2003
$478
2004
$502
2005
Source: Services Purchases: Not Your Typical Grind, Inside Supply Management, September 2003
Note: Chart represents respondents’ median spend
$529
2006
Developing KPIs for Indirect
Suppliers
Evaluation criteria for indirect suppliers can be grouped
into three categories
Contract
Compliance
Customer
Satisfaction
Cost Competitiveness and
Continuous Improvement
Definitions of Supplier Criteria
•
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?
Ultimate objective is to be able to quantifiably measure and compare
individual supplier’s performance
Specific KPIs can be tailored to meet the needs of
various suppliers
Contract
Compliance
Customer
Satisfaction
Cost Competitiveness and
Continuous Improvement
Attributes
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Actual cost vs.
budget
SLA
responsiveness
On time deliveries
Return rate
Order and billing
accuracy
Average lead-time
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Customer
Surveys
Technical
Support
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Supplier vs
Industry
Supplier vs
Other
Benchmark
Ecommerce
capability
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Supplier
Partnership
Initiative
Cost Reduction
Target
Objective and subjective attributes are necessary for measuring
indirect suppliers
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
Contract
Compliance
Customer
Satisfaction
30-50%
20-30%
Cost Competitiveness and
Continuous Improvement
30-50%
=
100%
Standard Scores
5
4
3
2
1
=
=
=
=
=
Superior – far exceeds expectations
Exceeds expectations
Meet expectations
Does not meet expectations
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
Contract Compliance Attributes
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Actual costs versus budget
Service level results
On time delivery
Return rate
Order and billing accuracy
Average lead-time
Contract compliance attributes mirror the supplier’s contractual
commitments
Customer Satisfaction
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.
Supplier Interaction: Infrequent ___ Moderate____High ____
Questions:
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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.
Scale:
–
–
–
–
–
1: Strongly Disagree
2: Disagree
3: Neutral
4: Agree
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
Issues
Mitigating Techniques
• 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
Cost Competitiveness and
Continuous Improvement
Benchmarking establishes cost competitiveness
• Supplier vs industry
• Supplier vs other benchmark
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Standard or target prices
“Should” cost prices
“Price paid” indices
Consumer Price Index (“CPI”)
• Ecommerce capability
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
4
3
2
1
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=
Superior – far exceeds expectations
Exceeds expectations
Meet expectations
Does not meet expectations
Significantly does not meet expectations
6% or more
4 – 6%
2 – 4%
0 – 2%
0%
Collecting the Data
Evaluate the costs/benefits of each data collection
method available
Unbiased
company
collected data
electronically
Cost to collect
data
Recommended
approach
Data collected /
tracked by
supplier
Data collection is the most difficult and time-consuming activity in the
KPI process. However, it is integral to a successful KPI program.
A wide range of sources can provide measurement data
Data
Warehouse
ERP Systems
Third-party
data
Supplierprovided
reports
Industry
benchmarks
Customer
Satisfaction
Surveys
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
Global Procurement Balanced Scorecard
Target
Performance
Actual
Performance
Weight
Weighted
Score
Contracts Compliance
Customer Satisfaction
Cost Competitiveness/
Continuous Improvement
4.0
4.0
4.0
4.3
30%
30%
1.20
1.29
4.0
3.5
40%
1.40
OmniMark Cutoff
Vendor Score
OmniMark Eligible
4.00
3.89
No
TEMPORARY LABOR :
ABC Staffing
SUPPLIER:
ABC Staffing
Contract Compliance
Metric
Act Score Weight Weighted
Confirmation of Order Delivery w/i 2 hours
Superior
100%
5
0.1
Excellent
95-100% 97%
4
0.1
Good
92-95%
3
0.1
Needs Improv
90-92%
2
0.1
Not Acceptable <90%
1
0.1
Customer Satisfaction
Satisfaction
Customer
Metric
Act
Score
Weight
Cost Competitiveness
Metric
Act Score Weight Weighted
Weighted
0
0.4
0
0
0
Candidates Received Survey (beginning of process)
Superior
100% 100%
5
0.3
Excellent
>=90%
4
0.3
Good
>=80%
3
0.3
Needs Improv
>=70%
2
0.3
Not Acceptable <70%
1
0.3
1.5
0
0
0
0
Base Pay Rates vs. Benchmark "Recruited"
Superior
Fav >=5%
5
Excellent
Fav <5%
4
Good
Parity
X
3
Needs Improv
Unfav <=5%
2
Not Acceptable
Unfav >5%
1
Qualified Resumes Received w/i 24 hours
Superior
100%
5
0.4
Excellent
97-100% 98%
4
0.4
Good
95-97%
3
0.4
Needs Improv
92-95%
2
0.4
Not Acceptable <92%
1
0.4
0
1.6
0
0
0
Temporary Attendance Rate
Superior
100%
Excellent
>=90% 90%
Good
>=80%
Needs Improv
>=70%
Not Acceptable <70%
5
4
3
2
1
0.2
0.2
0.2
0.2
0.2
0
0.8
0
0
0
Markup Rates vs. Benchmark (SSI Target = 30%)
Superior
Fav >3 BP
5
0.2
Excellent
Fav 1-3 BP
4
0.2
Good
Parity < 1BP Fav 0.5
3
0.2
Needs Improv
Unfav <3 BP
2
0.2
Not Acceptable
Unfav >3 BP
1
0.2
0
0
0.6
0
0
Selected Candidates Available w/i 72 hours
Superior
100%
5
0.3
Excellent
95-100% 97%
4
0.3
Good
90-95%
3
0.3
Needs Improv
85-90%
2
0.3
Not Acceptable <85%
1
0.3
0
1.2
0
0
0
Temporary Turnover Rate
Superior
0%
Excellent
<=2.5% 2.0%
Good
<=5.0%
Needs Improv
<=10%
Not Acceptable >10%
5
4
3
2
1
0.1
0.1
0.1
0.1
0.1
0
0.4
0
0
0
Consolidated Billing / Accuracy
Superior
100%
Excellent
96-100% 97%
Good
93-96%
Needs Improv
90-93%
Not Acceptable <90%
Pass-Through Costs
Superior
Fav >=5%
Excellent
Fav <5%
Good
Parity
Needs Improv
Unfav <=5%
Not Acceptable
Unfav >5%
0
0
0.15
0
0
0
0.8
0
0
0
Candidates Selected Survey (end of process)
Superior
100%
5
Excellent
>=90% 90%
4
Good
>=80%
3
Needs Improv
>=70%
2
Not Acceptable <70%
1
0.4
0.4
0.4
0.4
0.4
0
1.6
0
0
0
Benchmark vs. previously paid on "recruited" talent
5
4
3
2
1
0.2
0.2
0.2
0.2
0.2
Weighted Cat Avg
Comments
Top 3 metrics covered by new T&A log
Progress reviewed with supplier semi-monthly (initially)
Each resume / position category is a "transaction"
4.0
Weighted Cat Avg
Comments
Survey should be all temp "managers"
Survey should not be anonymous
"Received" survey for quality vs. minimum guidelines
"Selected" survey for work quality & quantity/efficiency, and hire-ability
4.3
X
5
4
3
2
1
0.25
0.25
0.25
0.25
0.25
0.05
0.05
0.05
0.05
0.05
Comments
Cost of drug / background + other pass-throughs vs. competitors
0
0
0.75
0
0
Continuous
Improvement
Continuous
Improvement
Metric
Act Score Weight Weighted
Systems Upgrades / Process Improvements Implemented
Superior
Fav >=10% 11%
5
0.25
1.25
Excellent
Fav >5%
4
0.25
0
Good
Fav < 5%
3
0.25
0
Needs Improv
None
2
0.25
0
Not Acceptable
Unfav
1
0.25
0
Base Pay Rate Savings Methodologies Implemented
Superior
Fav >10%
5
0.2
0
Excellent
Fav >5%
4
0.2
0
Good
Fav < 5%
X
3
0.2
0.6
Needs Improv
None
2
0.2
0
Not Acceptable
Unfav
1
0.2
0
Pass-Through Cost Methodologies Implemented
Superior
Fav >10%
5
0.05
Excellent
Fav >5%
4
0.05
Good
Fav < 5%
3
0.05
Needs Improv
None
0%
2
0.05
Not Acceptable
Unfav
1
0.05
Weighted Cat Avg
Comments
0
0
0
0.1
0
3.5
Value assessment of upgrades to process / systems employed
Base Pay Savings measured by market rate before / after agency input
Pass-Through Savings vs. currently paying
An overall score is calculated and used to measure
indirect suppliers’ performance
Indirect Supplier Evaluation Criteria
Contract
Compliance
Cost Competitiveness and
Continuous Improvement
Customer
Satisfaction
Weight X Score = Indirect Supplier KPI Score
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•
Weight = 30%
Score = 4
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•
Weight = 30%
Score = 4.3
•
•
Weight = 40%
Score = 3.5
Indirect Supplier
KPI Score
EXAMPLE
3.89
Guidelines for developing KPIs
KPI Guidelines
• Determine criteria for identifying which
suppliers will be measured by KPIs
Business Benefits
• What gets measured, gets done. Be
clear on what you’re measuring and
why.
• Generates supplier
improvements that benefit
you
• Develop jointly with suppliers to achieve
buy-in
• Justifies supplier’s inclusion
in your supply base
• Align KPIs with your goals and
objectives
• Identifies need to re-source
supplier
• Develop KPIs that are objective and
measurable
• Strengthens and improves
supplier relationships
• Limit KPIs to a manageable number
• Develops suppliers
• Communicate results to suppliers and
management on a timely basis
• Rewards for performance
• Complete the process and follow-up on
results and corrective actions
KPIs drive continuous improvement and cost savings
Questions