Value Chain Metrics and Score-carding

One of the Key steps to improving your Value chain is to measure and score-card the current state.  If you don’t measure where you are, how will you know what you are improving and by how much?  In the six-sigma process, this is a key step using the DMAIC approach – Define, Measure, Assess, Improve and Control.  So Measurement is the key first step in your improvement effort regardless of the project.

If you want to improve forecast accuracy, then you have to ask why that is important.  First of all measure and calculate forecast accuracy, identify the value drivers in the form of inventory and service.  Then connect the dots — connect inventory and service to forecast accuracy.  See if there is a correlation.  This should define your value opportunity.

If you take this approach, then you will understand the importance of developing a balanced metrics process for your entire value chain.  This metrics process should include all metrics necessary to improve the profitability of the business.  These metrics should interest the Chief Executive Officer of the business.

We at Demand Planning LLC, have worked with clients to design a balanced, holistic, and comprehensive  set of metrics for the entire Value Chain.   This should help understand the root-causes of inefficiency – obsolescence, inventory levels and unbalanced cost structures and drags on corporate profitability.  You also need to measure the impact of sub-optimal customer service levels on your topline.

The holistic value chain metrics may incorporate:

•  Profitability Metrics – Return on Investment and Return on Sales, Gross Margins and Net Margins
•  Capacity Utilization – Asset Turnover
•  Demand Metrics – Forecast Error, Forecast Bias etc.
•  Inventory Metrics – Days on Hand (DOH), SLOBs, Inventory Turns
•  Working Capital Metrics  – Receivables
•  Service Measures – First Time Fill Rate or FTFR, Perfect Order, In-Stock levels
•  Manufacturing or Execution Adherence
•  Logistics, Transportation and Distribution Performance

It is not only important to design and develop these metrics, but also to continuously measure and monitor corporate performance.  This should really be the starting point for any value opportunity.  You may also want to set a target as the goal for the improvement efforts.  Then find the people and partners that can commit to achieve those targets.