|Procurement / Business Strategy Strategy for creating a World-Class Procurement Organisation, Integration with Business Strategy and Planning.. Ability to influence the organisation's overall strategy. Selling the Procurement Business Case|
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Using supply chain metrics to quantify inefficiencies
Previously we looked at identifying the different supply chains in your organisation. This week we start looking at applying various metrics to these supply chains in order to compare them, identify areas for improvement and quantifying the possible improvement.
Inefficiency = COST
Any inefficiency in a supply chain creates a cost. If procurement is charged with delivering savings or cost reduction, then procurement is also charged with delivering supply chain improvement. Well, that’s my view and I’m sticking with it!
Supply Chain metric
Simply put, supply chain metric are defined measurements that tell us what is happening in a given supply chain.
There are many metrics we can apply and most have a degree of overlap. It is important to select metrics that support our goal – measuring and quantifying inefficiency to assist with selling improvement opportunities to management.
Selling to management
Most management teams are concerned with financial performance. You may know that a new process or piece of equipment will make things “work better” but you need to express this in financial terms.
Our goal is to:
· Measure current performance
· Benchmark this performance
· Perform a gap analysis
· Rank the inefficiencies by size
· Propose solutions
At this stage the only investment required is time, but this will change. We are laying down the foundations for when we start requiring investment, mandates and executive support.
Measuring supply chains
In the corporate world, the goal of a supply chain is profit! The supply chain that generates the most sales at the least cost wins. Put differently, the best supply chain is the one with the best ROI – Return on investment.
In government and not for profit organisations, aim for the best service at the lowest cost.
Financial supply chain measurements
To start, you will need information about the income and cash position of the company and the supply chains.
The income statement contain revenue, cost and profit data. The balance sheet looks at the cash position by documenting assets and liabilities, including inventory.
In a business context, profit is considered three ways. Each is important from a supply chain point of view.
1) Gross margin – Revenue less cost of goods sold. This measurement is usually stated as a percentage of total revenue.
2) Operating margin – Gross margin less cost of sales and administration. This to is usually expressed as a percentage of total revenue.
3) Economic profit – operating margin less taxes and interest expenses. We are interested in the interest charges as it is impacted by the amount of cash tied up in inventory, receivables and payables.
You can see how procurement can directly influence all three these measurements.
Lack of information
Finding financial information about your supply chains can be tricky. Private companies do not have to publish their financial results, and listed companies often do not publish financial information in a format that is aligned with the actual supply chains.
Use this to your advantage!
You will have to sell supply chain issues to financial people. This is a great way to start building support and contacts in the financial departments.
Contact your financial department and explain what data you are looking for, and why you are looking for this data. Ask if the person you are speaking with can help, or suggest someone that can. Don’t be scared to ask - remember, you are about to help someone achieve his or her goals.
When you have your financial data broadly aligned to your defined supply chains, the fun part can start!
Next week we will look at benchmarking the financial data we have gathered, and performing some “what – if” analysis on this data.
We will also start looking at what cost drivers we as procurement professionals can influence, both directly and indirectly.
If you want to contact me offline to discuss specific points, feel free to send me a note!
David van der Walt
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