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SPOTLIGHT
REPORT
KPIs KEY TO SUCCESSFUL
THE ASQ SUPPLY CHAIN
GLOBAL
STATE OF Chain Affected by Weakest Link
QUALITY If you cant measure it, you cant manage it. This GLOBAL STATE
quote is widely attributed to Dr. W. Edwards Deming, OF QUALITY 2
RESEARCH the leading management thinker in quality and
For the second time in
original management science guru. However, this is
three years, ASQ and APQC
an inaccurately shortened version of a much more
have partnered together to
complex quote from his book, The New Economics.
conduct a study focusing
Deming actually said, It is wrong to suppose that if on the state of quality from
you cant measure it, you cant manage ita costly a worldwide perspective.
myth. While the shortened version holds some This project will focus on
truththe value of data to help improve the quality gathering input on quality-
of an organization is very importantDemings true related practices from
philosophy centered around the fact that successful organizations of various
companies must also manage what cannot be revenue sizes from a core set
measured (the data-invisible elements). of countries. This spotlight
is the second in a series of
Focusing on the measurable elements of the business, three that will lead up to the
key performance indicators, or KPIs, are specific publication of the full report
metrics critical to determining how well an organization available in May 2016.
is performing. When involving a supply chain, often
composed of numerous heterogeneous organizations,
the complexities around measuring performance are apparent. Establishing meaningful
KPIs is essential to driving operational excellence throughout the entire supply.

In addition to KPIs, suppliers must have open and honest relationships with
customers. Furthermore, buyers should share their organizations mission and vision
to help suppliers understand the impact that defects or delays could have on the end
customer. Suppliers will be compelled to think differentlyto help eliminate waste,
improve efficiency and quality, and have products and services delivered on time.
This is critical because when you need the suppliers for exceptions, like spikes or
reductions in demand, the suppliers will be more willing to work with you.

ASQ and APQC called upon several renowned supply chain experts around the world
for their insight into the role and importance of establishing KPIs that effectively
measure and predict supply chain performance.

Prem Vrat, Ph.D., pro-chancellor and professor of eminence and chief mentor at The
Northcap University, in India, says metrics are important in the supply chain to evaluate
the efficiencies and effectiveness of the process. According to Vrat, (KPIs) will also
identify the weak links in the supply chain so that action can be initiated to enhance
performance of these weak links because the chain is affected by its weakest link.

Clovis Bergamo Filho, president of Six Sigma Brasil, shares a similar perspective.
Simply put, he says, if you dont have the robust process and measures in place, it is
not possible to increase the efficiencies.
 Janet Raddatz, vice president of quality and food Process efficiency
safety systems at Sargento Foods in Wisconsin,
Finished-product, first-pass quality yield for
USA, agrees, adding that measurements must
primary products
be tied to the drivers of the company. The
objective, really, is to find out what youre not Percentage of defective parts per million
doing well and fix it, she says. You want to Warranty costs
identify what impacts your business and whats
costing you. What is the cost of poor quality?
(repair and
replacement) as a
30% of ASQ
Global State of
percentage of sales
Supply chain KPIs, while critical to business Quality 2 respondents
in the United States, are a relatively new train Tier1 suppliers
Cost effectiveness
phenomenon in Southeast Asia, according to on their quality
Brad Feuling, CEO of Kong and Allan Consulting Scrap and rework
management
costs as a percentage
Co. Ltd. in Shanghai, China. Clearly, China
and other parts of Asia impact so many supply of sales system. 64% dont
train any of
chains, Feuling said. There are a lot of supply Total cost of quality
chain influencers, but (Asias) view of supply per $100,000 theirsuppliers.
chain is relatively new. Why is it so important? inrevenue
Its all about cost and efficiency. But its also
about customer demands. For each of the following KPIs, the bottom,
median, and top performersrepresenting
Feuling adds that supply chain KPIs must be standard quartile groupingswill be called out.
in line with the goals of your customers and The top performers benchmark represents
that businesses need to better understand the performance level where 75 percent
their buyers needsespecially from a global of all responses fall below. Conversely, the
perspective and as bottom performers benchmark reflects
companies and supply the performance level where 25 percent of
50% of respondents to the chains expand. Supply all responses fall below. The cross-industry
Global State of Quality 2 chain is a collection of benchmarks below or industry-specific data
survey indicated that supply contributors, and aligning can be found on the OSB to make comparisons
chain disruptions are the most them is key to being between organizations.
successful, whether thats
concerning risk within their
organization.
reducing costs or time. Process Efficiency Key
The remainder of the Performance Indicators
report provides guidance on how to select Process efficiency KPIs are an important group
and implement KPIs that improve operational of indicators that help measure the performance
performance and drive business strategy. of any supply chain organization. Due to the
complexity of a cross-functional, cross-enterprise
This next section is broken into two categories of supply chain, process efficiency indicators
KPIs: process efficiency and cost effectiveness. allow organizations to measure their efficiency
Each section describes a series of KPIs viewed performance internally and externally, with the
as important measures that monitor where help of the OSB at APQC. The metrics included
supply chains can control and improve quality in this report are not an exhaustive list, but are
performance. Additional relevant data is drawn merely a few highlighted metrics believed to
from the open standards benchmarking (OSB) be important. To properly manage the supply
database at APQC. The OSB database helps chain, a series of KPIs is needed to uncover
organizations compare how they are performing performance improvement opportunities.
against a wide array of companies. Each of the
measures described in process efficiency and
cost effectiveness is comparable in the OSB:

Spotlight Report | 2
 Finished-product, first-pass quality yield
for primary products
Finished-product, first-pass quality yield is
an important KPI to monitor the quality and
performance of the supply chain. First-pass
yield measures how many units are completed
in the first pass through the supply chain with
no rework. If an organization decides not to
measure final-product, first-pass yield, it risks
high levels of process inefficiency and waste.
First-pass yield helps companies capture and
identify high-waste and low-efficiency areas for
process improvement and additional monitoring.
According to Jeff Varney, APQCs business and
performance management practice lead, The
key to this metric is not how well the product
or service is built, but can supply chain play a
role in positively influencing the manufacturing
process? Can the supply chain organization
source and provide high-quality products that
Finished-product, first-pass quality yield for primary products
100%
99%
98%
98%
97%
96%
97%
95%
95%
94%
93%
Bottom Median Top
92%
N=771
Percentage of defective parts per million
0.35%
0.30%
0.30%
0.25%
lead to first-pass approval for key products within
the product portfolio?
Percentage of defective parts per million
Percentage of defective parts per million is a KPI
that measures the amount of defective parts
out of total parts produced. This KPI focuses on
the quality of the process and output before the
product or unit is shipped. In most supply chains,
defective parts per million should be tracked on
some form of control chart with an upper and
lower limitessentially, the expectation of how
well the supply chain should operate. Defective
part per million is often used in process
improvement initiatives as a stake in the ground
for performance.
The supply chain group has to make sure they
are sourcing the right parts to decrease the
overall number of defective parts. Additionally,
the supply chain team needs to understand how
many of those defective parts were a result of
the assembly of defective parts or bad materials
vs. the incorrect use of part. The triage continues
from there to understand whether a vendor of a
part continues to have a defective part over time
or is there a different issue at hand? Based upon
that analysis, then the organization has to decide
if it makes sense to start looking at a more
expensive vendor to justify a lower defective
parts per million?
Warranty costs (repair and replacement)
as a percentage of sales
Warranty costs as a percentage of sales
compares the cost spent on repairs and
replacement of distributed units to sales. This
metric focuses on the amount of units that are
defective after distribution to the customer
rather than in process. The warranty costs KPI
can be used to track the effectiveness of the
quality control group as well as the quality of
product being produced.

0.20% Warranty costs can have a huge impact on

0.15% organizations. The parts being supplied might
not be meeting the needs of the business,
0.10%
and ultimately the consumer. It is up to the
0.05% 0.07%
leadership of the supply chain team to verify that
Bottom Median Top 0% the vendor or partner can meet the requirements
0
N=36 of the component, and the requirements of

Spotlight Report | 3
 Cost effectiveness indicators allow for an
Warranty costs (repair and replacement) as a percentage of sales organization to better manage and measure their
cost effectiveness performance, both internally
2.5%
and externally. As with process efficiency
2%
2.3% indicators, this is not an exhaustive list of
metrics. To properly manage the supply chain, a
1.5% series of KPIs is required to accommodate their
respective shortcomings.
1%
1%
Scrap and rework costs as a
0.5%
0.5% percentage of sales
Bottom Median Top The scrap and rework cost indicator measures
0
N=854 the quality of and waste in the supply chain
process. This KPI will be tied inherently to other
the business. The goal is to minimize the costs process efficiency indicators, such as defective
of warranty support by procuring parts that parts per million, as it measures the cost of poor
are manufactured, shipped, and transported quality. In any supply chain organization, a poorly
correctly to avoid damage, as an example. These managed process can lead to increased scrap
might not be directly to supply chain, but the and rework costs.
supply chain organization plays a role in reducing
warranty costs. When defining this KPI, an organization
must have properly scoped the processas
According to the Global State of Quality 2 data, well as identified any shadow processes
26 percent of respondents have reported issues (undocumented processes completed by
with overall cost of quality, including recalls, individual actors). Scrap and rework costs can
counterfeit, product defects, food safety, and be reduced by systematically fixing a problem
supply shortage. Furthermore, 46 percent of when an error is produced.
respondents reported product defects as a
quality-related issue. Scrap and rework are challenging for any
organization, according to Varney. Think about
Cost Effectiveness Key when you drive by a new house being built, and
the pile of scrap wood that is piled up during
Performance Indicators constructionthat is all waste for a variety of
Cost effectiveness KPIs are another important reasons. However, what if one of those reasons
group of indicators that help measure the is that the wrong size of lumber was ordered,
performance of any supply chain organization. and the on-site team had to modify the wood
to make it work? This is where the role of the
supply chain comes into make sure that the
Scrap and rework costs as a percentage of sales delivery of goods are the pieces or parts that
are required for the job. This not only drives the
2.5%
needs of a specific line of business, but supports
the overall needs of the business.
2% 2.2%

The Global State of Quality 2 data indicates that

1.5%
waste reduction is also on the minds of our
1.2%
participants. Almost 55 percent of the survey
1%
respondents to date use waste reduction as a
0.5% way to drive profitability.
0.6%

Bottom Median Top

0
N=738

Spotlight Report | 4
 Total cost of quality per $100,000
inrevenue
The cost of quality is a very important KPI to
ensure cost effectiveness. Cost of quality has
two components: the cost of good quality and
the cost of poor quality. Specifically, companies
must pay to ensure good quality is consistent
through quality inspection activities, prevention
mechanisms, and other quality control vehicles.
In addition, companies must also pay for the
cost of poor quality when a defect exists or the
output does not meet requirements.
Therefore, the real question is What is the cost
of poor quality? Which then flows into questions
like, how much am I spending versus how much
am I avoiding? And how do higher-quality supply
chain practices drive a higher profit margin for
the business?
Total cost of quality per $100,000 in revenue
$1,600
$1,400 $1,506.57
$1,200
$1,000
$800
$600 $747.46
$400
$200 $350.00
Bottom Median Top
0
N=24
Advice From the Experts
The same group of supply chain experts shares
their recommendations on how to either begin or
improve upon their use of effective KPIs within
their supply chain management.
Organizations that currently dont measure
their supply chain effectiveness can put in place
the necessary KPIs to boost their business by
Spotlight Report
determining what the right measurements are
and tie them to the drivers of your business,
Raddatz said.
Organizations should identify the right KPIs
relevant to the nature of their business and the
dynamics of external business environment, Vrat
said. This can be done either by benchmarking
with the role models in their class (or) adapting
to the specifics of the given situation.
But identifying effective metrics and fixing
poorly performing objectives is only part of
implementing KPIs in supply chain.
Your KPIs need to be in line with the goals of
your customers, Feuling said. You have to ask
yourself, What are my customer demands? A
lot of companies ask that, but they dont always
act on it. But its important to correlate your
metrics to those of your customers.
Its difficult, but the KPIs from all participants in
a supply chain have to be aligned.
Furthermore, and in an effort to fix what youre
not doing well, as Raddatz said, organizations
need to identify the cost of poor quality to
ensure they are spending resources on the
issues that truly are inefficient.
You have to be able to measure (processes) to
determine if its a problem, because, honestly,
sometimes its not, she said, adding that
sometimes fixing an issue costs more than the
issue itself. Compare your measurement to the
baseline to determine the effect on the business.
In the end, minimizing waste is going to affect
your bottom line.
And talk to the people on the floor, not
just top management, Raddatz said. We
encourage people to say something if they see
something that could be improved. Employees
have a lot of good ideas and they can help
increase efficiencies and improve processes
that need improving.
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About ASQ
ASQ is a global community of people
dedicated to quality who share the ideas
and tools that make our world work
better. With millions of individual and
organizational members of the community
in 150 countries, ASQ has the reputation
and reach to bring together the diverse
quality champions who are transforming
the worlds corporations, organizations,
and communities to meet tomorrows
critical challenges. Celebrating 70 years
in 2016, ASQ, with its world headquarters
in Milwaukee, WI, USA, operates regional
centers in the United States and Canada,
North Asia, South Asia, Latin America, and
Middle East and Africa. Learn more about
ASQs members, mission, technologies,
and training at asq.org.
To learn more about the ASQ Global State of Quality 2 research project
or to access additional resources please visit the ASQ Global State of
Quality website globalstateofquality.org.
Spotlight Report
About APQC
APQC is a member-based nonprofit and one
of the leading proponents of benchmarking
and best practice business research.
Working with more than 500 organizations
worldwide in all industries, APQC focuses
on providing organizations with the
information they need to work smarter,
2
faster, and with confidence. Every day we
uncover the processes and practices that
push organizations from good to great. Visit
us at www.apqc.org and learn how you can
make best practices your practices.
THE ASQ
GLOBAL
STATE OF
QUALITY
RESEARCH
Contact Information for ASQ
and APQC:
Laurel Nelson-Rowe, CQIA
Managing Director, ASQ
lnelson-rowe@asq.org
Jonathan Kraft
Project Manager, APQC
jkraft@apqc.org
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