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

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 providers 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 Trade Practices

Implement Strategic Sourcing (SSI)

Financial Practices

KPIs sustain strategic sourcing savings

Source: Jim Kilts Is An Old-School Curmudgeon, Fortune, December 30, 2002

What is Indirect Spend?

Computer/Telecom Energy/Utilities Printing/Marketing/Advertising Employee Benefits Office Products MRO 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)

Indirect

Group Total

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 companys 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% 20%

Marketing IT Pro Services Construction/Eng Inventory Manufacturing

Direct Material 51%

48%

Other: Accounting Facilities Legal Logistics Real Estate Temp Labor Travel

Source: Defining and Determining the Services Spend in Todays Services Economy, CAPS, July 2003

Participants in a recent CAPS survey expect indirect spend for services to increase
Indirect Spend - Services ($ Millions) 5-yr CAGR = 5%
= Projected

$434

$456

$478

$502

$529

2002

2003

2004

2005

2006

Source: Services Purchases: Not Your Typical Grind, Inside Supply Management, September 2003 Note: Chart represents respondents median spend

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 suppliers performance

Specific KPIs can be tailored to meet the needs of various suppliers

Contract Compliance Customer Satisfaction Cost Competitiveness and Continuous Improvement

Attributes

Actual cost vs. budget SLA responsiveness On time deliveries Return rate Order and billing accuracy Average lead-time

Customer Surveys Technical Support

Supplier vs Industry Supplier vs Other Benchmark Ecommerce capability

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 30-50% Customer Satisfaction 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

Actual costs versus budget Service level results On time delivery Return rate Order and billing accuracy Average lead-time

Contract compliance attributes mirror the suppliers 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 customers opinions in regards to supplier performance.
Supplier Interaction: Infrequent ___ Moderate____High ____ Questions:
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. 1: Strongly Disagree 2: Disagree 3: Neutral 4: Agree 5: Strongly Agree

Scale:

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 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

Customer satisfaction tends to be overwhelmed by bad experience, even if the bad experience was not the suppliers 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

Cost Competitiveness and Continuous Improvement

Benchmarking establishes cost competitiveness

Supplier vs industry Supplier vs other benchmark
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 = = = = = 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 Recommended approach Data collected / tracked by supplier Cost to collect data

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 Supplierprovided reports Industry benchmarks Customer Satisfaction Surveys

Third-party data

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
TEMPORARY LABOR : ABC Staffing

Target Performance 4.0 4.0 4.0 4.00 3.89 No

Actual Performance 4.0 4.3 3.5

Weight 30% 30% 40%

Weighted Score 1.20 1.29 1.40

Contracts Compliance Customer Satisfaction Cost Competitiveness/ Continuous Improvement OmniMark Cutoff Vendor Score OmniMark Eligible

SUPPLIER:

ABC Staffing Contract Compliance Metric Act Score Weight Weighted 0 0.4 0 0 0 0 1.6 0 0 0 0 1.2 0 0 0 0 0.8 0 0 0 4.0

Customer Satisfaction Satisfaction Customer Metric Act Score

Weight

Weighted 1.5 0 0 0 0 0 0.8 0 0 0 0 0.4 0 0 0 0 1.6 0 0 0 4.3

Cost Competitiveness Metric Act Score Weight Weighted 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 0.25 0.25 0.25 0.25 0.25 0 0 0.75 0 0 0 0 0.6 0 0 0 0 0.15 0 0

Continuous Improvement Continuous Improvement

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 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 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 Consolidated Billing / Accuracy Superior 100% Excellent 96-100% 97% Good 93-96% Needs Improv 90-93% Not Acceptable <90% 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"

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 Temporary Attendance Rate Superior 100% Excellent >=90% 90% Good >=80% Needs Improv >=70% Not Acceptable <70% Temporary Turnover Rate Superior 0% Excellent <=2.5% 2.0% Good <=5.0% Needs Improv <=10% Not Acceptable >10% 5 4 3 2 1 5 4 3 2 1 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.4 0.4 0.4 0.4 0.4

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 Pass-Through Costs Superior Fav >=5% Excellent Fav <5% Good Parity Needs Improv Unfav <=5% Not Acceptable Unfav >5% Comments
Benchmark vs. previously paid on "recruited" talent Cost of drug / background + other pass-throughs vs. competitors

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
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

5 4 3 2 1

0.05 0.05 0.05 0.05 0.05

5 4 3 2 1

0.2 0.2 0.2 0.2 0.2

Candidates Selected Survey (end of process) Superior 100% 5 Excellent >=90% 90% 4 Good >=80% 3 Needs Improv >=70% 2 Not Acceptable <70% 1 Weighted Cat Avg Comments
Survey should be all temp "managers" Survey should not be anonymous "Received" survey for quality vs. minimum guidelines

0 0 0 0.1 0 3.5

"Selected" survey for work quality & quantity/efficiency, and hire-ability

An overall score is calculated and used to measure indirect suppliers performance

Indirect Supplier Evaluation Criteria
Contract Compliance Customer Satisfaction

Cost Competitiveness and Continuous Improvement

Weight X Score = Indirect Supplier KPI Score

Weight = 30% Score = 4

Weight = 30% Score = 4.3 Indirect Supplier KPI Score

Weight = 40% Score = 3.5

EXAMPLE

3.89

Guidelines for developing KPIs

KPI Guidelines
Determine criteria for identifying which suppliers will be measured by KPIs What gets measured, gets done. Be clear on what youre measuring and why.

Business Benefits
Generates supplier improvements that benefit you Justifies suppliers inclusion in your supply base Identifies need to re-source supplier Strengthens and improves supplier relationships Develops suppliers Rewards for performance

Develop jointly with suppliers to achieve buy-in

Align KPIs with your goals and objectives Develop KPIs that are objective and measurable Limit KPIs to a manageable number Communicate results to suppliers and management on a timely basis Complete the process and follow-up on results and corrective actions

KPIs drive continuous improvement and cost savings

Questions