"Do metrics really work??"
On any given day you can look in on a contract manufacturing (CM) relationship and find both sides using a variety of performance metrics. The obvious purpose of these is to manage and improve performance. The basic metrics like inventory and on- time delivery are adequate at doing just that. The question is whether there is anything you can measure that would help drive the proactive behaviors that are the hallmark of a truly successful manufacturing relationship.
All of the activity in the Operations or Supply Chain environment can be boiled down to three fundamental deliverables: supply assurance, cost management, and inventory management. In the following paragraphs we discuss each one of them and give a perspective on a different way to measure success that can provide a richer context for improvement.
1. Supply
We all know that demand is uncertain and can change at a moment’s notice. Most OEMs have language in their CM contracts that looks something like this: “demand can change 20% within 4 weeks, 30% within 8 weeks.” While this might give you a certain level of comfort, you have to ask what these numbers really mean. Is there anything behind them? How do you measure the flexibility you actually get? Let’s deal with the first question. In our experience, companies have typically done very little to make the flexibility numbers in the contract a reality. Those that have, usually take the easy way out and buy their so called flexibility with extra inventory. This takes us to the second question. One way to measure true flexibility is to find the amount of inventory risk you must take on to get a certain level of flexibility. As you make your supply chain more responsive through reduced lead- times and increased information velocity, you will see the numbers drop.
2. Cost
Almost every company has some type of clause in their CM contracts that talk about how savings in price will be split between the parties. Measuring “price” savings is easy and very tangible. But what is better - to pay $75 dollars for something and never see a price reduction OR to pay $100 and to get $25 in savings over time? The disadvantage of price savings is that at one point you were paying more. From the example, it is clear that never having paid the extra $25 is better than paying it and then slowly getting it back in price reductions. The other problem is that the traditional metric does nothing to account for non-price value. We are sometimes so focused on price that we forget to look for synergies that lead to lower total costs. An alternate way to look at cost is to measure your product gross margins. This does a better job of accounting for total cost and has the benefit of tracking how well you are staying in front of the market.
3. Inventory
You probably have a pretty good idea how much inventory your company has on its books. You might even know how much inventory your CM has on-hand to meet your forecasts and purchase orders. By the time the inventory is on- hand, you have missed your opportunity to proactively avoid it. The chain of events that lead to excess inventory start with your risks which are based on your manufacturing lead-times, component lead-times, and the types of components you have designed into your products. We call this risk profile your Inventory Exposure. By measuring Inventory Exposure, you begin to see leverage points long before inventory shows up at your back door. Once you can see and measure something like this you can begin to take proactive steps to avoid inventory.
The traditional metrics have a role and should not be discarded. We think they should be augmented with metrics that give you a view beyond the surface. All of the items we mentioned are less obvious and may be slightly more difficult to measure. They do open a window to deeper improvements and give your organization a perspective that can lead to breakthrough thinking.
One of our passions at Symphony is finding creative ways to accelerate improvements in supply chain and operational performance. If you think we can help your organization break the mold of mediocre performance, we would welcome the opportunity to discuss it with you further. Please contact us at info@symphonyconsult.com.