BUSINESS INTELLIGENCE

KPIs OF SCM IN

MANUFACTURING INDUSTRIES

SUBMITTED BY

LAVANYA DEEPIKA TIGGA 215109036

ARUNAN V P 215109037
SARAVANAN S 215109070

SUBMITTED ON

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 15TH APRIL 2010

INDEX

No TITLE Page No

1 INTRODUCTION 3
2 MANUFACTURING INDUSTRY 7
3 SUPPLY CHAIN MANAGEMENT 9
4 KPI FOR SCM 11
5 SSTP, TRICHY 15
6 IDENTIFIED KPIs 16
7 CONCLUSION 18
8 REFERENCES 19

INTRODUCTION
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KEY PERFORMANCE INDICATOR

Key Performance Indicators (KPIs) help organizations understand how well they are performing
in relation to their strategic goals and objectives.

In the broadest sense, a KPI provides the most important performance information that enables
organizations or their stakeholders to understand whether the organization is on track or not.

Why do we measure performance?

The reason why we measure performance in organizations is often reduced to simple homilies,
such as ‘you can’t manage anything unless you measure it’ or ‘what gets measured gets done’.
The tree main reasons for measuring performance are (see also Figure 1):

 To lean and improve

 To report externally and demonstrate compliance
 To control and monitor people

Of these three the first is the most important, the second is something organizations just have to
do and the third one can cause major problems.
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Measuring to learn and improve performance

Measuring for learning and improvement is the most natural form of using KPIs and something
we do every day in our daily lives. The aim is to equip our employees with the information they
need to make better informed decisions that lead to improvements. In this context, KPIs are used
internally as the evidence to inform management decisions, to challenge strategic assumptions
and for continuous learning and improvement. 

Measuring to report externally and demonstrate compliance

Another reason for collecting KPIs is to inform external stakeholders and to comply with
external reporting regulations and information requests. When measuring for external reporting
and compliance purposes, any reports and associated indicators can either be produced on a
compulsory basis such as annual financial statements, accounts, or performance reports for
regulators; or can be on a voluntary basis such as environmental impact reports, for example.  

Measuring to control and monitor people

KPIs can also be used in a top-down command-and-control fashion to guide and control people’s
behaviors and actions. Here, measures are used to set goals or rules, to objectively access the
achievement of these goals, and to provide feedback on any unwanted variance between
achievements and goals. Here, the aim of measurement is to eliminate variance and improve
conformity. In this context, measures are often tightly linked to reward and recognition
structures. Research has shown that this approach is dangerous and often leads to a culture in
which people focus on delivering the measures but not the performance (i.e. hitting the target but
missing the point).

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The problems with KPIs

In practice, the term KPI is overused and often describes any form of measurement data and
performance metrics used to measure business performance.  Instead of clearly identifying the
information needs and then carefully designing the most appropriate indicators to assess
performance, we often observe what we have termed the ‘ICE’ approach:

 Identify everything that is easy to measure and count

 Collect and report the data on everything that is easy to measure and count
 End up scratching your head thinking “What the heck are we going to do with all this
performance data stuff?

Using KPIs correctly

Best practice organizations

a. Clearly understand what indicators are required for learning and improvement and focus
on those,
b. They separate out the external reporting indicators if they are not relevant internally to
avoid confusion and data overload, and
c. They try to avoid using indicators for controlling people.

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 MANUFACTURING INDUSTRY - PROFILE

Manufacturing is the use of machines, tools and labor to make things for use or sale. The term
may refer to a range of human activity, from handicraft to high tech, but is most commonly
applied to industrial production, in which raw materials are transformed into finished goods on a
large scale. Such finished goods may be used for manufacturing other, more complex products,
such as household appliances or automobiles, or sold to wholesalers, who in turn sell them to
retailers, who then sell them to end users - the "consumers".

Manufacturing takes turns under all types of economic systems. In a free market economy,
manufacturing is usually directed toward the mass production of products for sale to consumers
at a profit. In a collectivist economy, manufacturing is more frequently directed by the state to
supply a centrally planned economy. In free market economies, manufacturing occurs under
some degree of government regulation.

Modern manufacturing includes all intermediate processes required for the production and
integration of a product's components. Some industries, such as semiconductor and steel
manufacturers use the term fabrication instead.

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The manufacturing industry in India, has all the qualities which enhance economic development,
increase the productivity of the manufacturing industry and face competition from the global
markets. The Manufacturing industry in India is believed to have the potential of improving the
economic condition of India.

Indian manufacturing industry: Research findings

India has a working population of 75%. Out of this, only 600 million have acquired education till
middle school. Due to this reason, the manufacturing industry in India, which is labor intensive,
can provide the requisite number of employment units in the country. Studies have indicated that
the productivity of the manufacturing industry in India is approximately 1/5th of the productivity
in the manufacturing industry of United States of America. It is about ½ as compared to the
productivity levels in South Korea as well as Taiwan. Labor productivity has escalated only to a
small extent in case of India in comparison to United States of America, on the contrary, labor
productivity has increased manifold in countries like Taiwan and Korea.

Manufacturing industry in India and exports:

Exports of manufactured goods in India accounted for 75% in comparison to exports of
manufactured goods all over the world. Owing to the performance manifested by the export
sector in India, the scenario indicates that there is less competition in the manufacturing segment.
Absence of competition is also established by the fact that in spite of reducing the tariff in the
early and mid 90s, India continued to be one of the protected economies of the world.
Contribution of India's export towards international market grew from 05% to 0.7% during 1990
to 2000. During the same period, Malaysia, China, Thailand and South Korea, registered almost
double increase in exports.

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 SUPPLY CHAIN MANAGEMENT

Supply chain management (SCM) is a process used by companies to ensure that their supply
chain is efficient and cost-effective. A supply chain is the collection of steps that a company
takes to transform raw components into the final product.

Typically, supply chain management is comprised of five stages:

 Plan

 Develop

 Make

 Deliver

 Return.

1. The first stage in supply chain management is known as PLAN. A plan or strategy must
be developed to address how a given good or service will meet the needs of the
customers. A significant portion of the strategy should focus on planning a profitable
supply chain.

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 2. DEVELOP is the next stage in supply chain management. It involves building a strong
relationship with suppliers of the raw materials needed in making the product the
company delivers. This phase involves not only identifying reliable suppliers but also
planning methods for shipping, delivery, and payment.

3. At the third stage, MAKE, the product is manufactured, tested, packaged, and scheduled
for delivery.

4. Then, at the logistics phase, customer orders are received and delivery of the goods is
planned. This fourth stage of supply chain management stage is aptly named DELIVER.

5. The final stage of supply chain management is called RETURN. As the name suggests,
during this stage, customers may return defective products. The company will also
address customer questions in this stage.

Another model for understanding supply chain management groups all management activities
into three categories:

 Strategic

 Tactical

 Operational.

Strategic activities include building relationships with suppliers and customers, and integrating
information technology (IT) within the supply chain. Studying competitors and making decisions
regarding production and delivery would fall under the tactical category. The operational
category includes the daily management of the supply chain, including the making of production
schedules.

Companies use forecast-distribution models in order to have the appropriate inventory, or safety
stock, necessary to meet fluctuations in customer demand. Forecast-distribution helps companies
maintain more efficient, and therefore more effective, supply chain management.

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This greater variation in demand that can be seen in the supply chain as one moves away from
the end customer is known as the whiplash or bullwhip effect. A possible solution to this effect is
Kanban, a demand-driven supply chain. The participants in the supply chain would react to
actual customer orders, not forecasts of them.

KPIs FOR SCM

Key Performance Indicators define a set of values used to measure against. These raw sets of
values fed to systems to summarize information against are called indicators. Indicators
identifiable as possible candidates for KPIs can be summarized into the following sub-categories:

 Quantitative indicators which can be presented as a number.

 Practical indicators that interface with existing company processes.
 Directional indicators specifying whether an organization is getting better or not.
 Actionable indicators are sufficiently in an organization's control to effect change.
 Financial indicators used in performance measurement and when looking at an operating
index

Some important KPIs for Supply Chain Management in a manufacturing industry

1. Delivered In-Full, On-Time

Measures the percentage of orders delivered to the customer, which are both complete and on
time.

2. Software used to support supply chain

Measures the number of software products used within the supply chain management process, in
order to support it. Supply chain management software (SCMS) is an example of software tools
and modules used for supply chain transactions, managing supplier relationships or other
business processes associated with this.

3. Freight cost per unit shipped

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Measures the average freight cost incurred for every unit shipped during the reporting period.

4. Average inventory value

Measures the average value of the inventory during a month, calculated by dividing the total sum
of the inventory during a period with the number of months. Measures the average value of the
inventory during a month, calculated by dividing the total sum of the inventory during a period
with the number of months.

5. Upside supply chain flexibility

Measures the time it takes a supply chain to respond to an unplanned percentage of increase in
demand without service or cost penalty.

6. Cycle Time

Cycle time is the total time from the beginning to the end of your process, as defined by you and
your customer. Cycle time includes process time, during which a unit is acted upon to bring it
closer to an output, and delay time, during which a unit of work is spent waiting to take the next
action.

Cycle Time Ratio = StandardCycleTime / RealCycleTime

7. Utilization

Extent or level to which the productive capacity of a plant is being used in generation of goods
and services. Expressed usually as a percentage, it is computed by dividing the total capacity
with the portion being utilized.

8. Rejection rate

In manufacturing, the rejection rate is the percentage of processed parts that are rejected, for a
fixed period of time or lot of pieces.

RR = (Rejectedpieces/ProcessedPieces) x100

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9. Fill Rate

Calculates the service level between 2 parties. It is usually a measure of shipping performance
expressed as a percentage of the total order.

Line Count Fill Rate:

The amount of order lines shipped on the initial shipment versus the amount of  lines ordered.
This measure may or may not take into consideration the requested delivery date

SKU Fill Rate:

The number of SKU's (Stock Keeping Units) ordered and shipped is taken into consideration.
Above, we consider each Order Line to have an equal

Case Fill Rate:

The amount of cases shipped on the initial shipment versus the amount of cases ordered.

10. DPMO - Defects Per Million Opportunities

DPMO is a Six Sigma calculation used to indicate the amount of defects in a process per one
million opportunities.

DPMO = (Total Number of Defects / Total Number of Opportunities for a Defect)*1,000,000

Some defects can pass through a quality inspection and have little impact on the end product.
Other defects can result in re-work or scrap.

DPMO is sometimes used instead of Defect per Unit to allow for comparison between processes
with different levels of complexity.

Six Sigma uses statistical analysis to measure a company’s performance by identifying defects in
a manufacturing process. The goal of Six Sigma is to reduce process output variation to + or -
three standard deviations. This results in no more than 3.4 defects per million opportunities.

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11. Backorder

It is an unfilled customer order. A backorder is demand (immediate or past due) against an item
whose current stock level is insufficient to satisfy demand.

Some companies count items that are not confirmed (not allocated) and past the Requested
Delivery Date (or Requested Ship Date). Other companies may also count those items with stock
confirmed, but past due.

Backorders may be expressed in "pieces", "SKU's" or in "value". Backorder calculations are

often tracked at a variety of levels. Example: Customer, Division, Total Company

Aged Backorder

Reports on backorders in past-due time buckets based on the Requested Delivery Date/Requested
Ship Date.

12. Reverse Logistics

It is "the process of planning, implementing, and controlling the efficient, cost effective flow of
raw materials, in-process inventory, finished goods and related information from the point of
consumption to the point of origin for the purpose of recapturing value or proper disposal. More
precisely, reverse logistics is the process of moving goods from their typical final destination for
the purpose of capturing value, or proper disposal.

Remanufacturing and refurbishing activities also may be included in the definition of reverse
logistics. The reverse logistics process includes the management and the sale of surplus as well
as returned equipment and machines from the hardware leasing business.

Normally, logistics deal with events that bring the product towards the customer. In the case of
reverse, the resource goes at least one step back in the supply chain. For instance, goods move
from the customer to the distributor or to the manufacturer

13. Inventory turnover

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A ratio showing how many times a company's inventory is sold and replaced over a period.

Inventory turnover = Cost of goods sold/average inventory

Average inventory = (Beginning inventory + ending inventory)/2

SSTP, TRICHY

INFERENCES FROM THE VISIT TO SSTP

SSTP is one of the major suppliers for BHEL. Bharat Heavy Electricals Limited (BHEL),
established in 1953, is one of leading power generation equipment manufacturers in the world.
BHEL has 14 manufacturing units, 13 Regional Operation Divisions and more than hundred
"service-at-sites" facilities spread all over India. BHEL offers comprehensive service to its
customers in Conventional and Non-Conventional Energy, Industry, Transportation,
Telecommunication and Oil sectors. BHEL has also bagged export orders from 40 countries
around the world.

BHEL – Trichy: The High Pressure Boiler Plant of the Bharat Heavy Electricals Limited was
setup in 1963 for the manufacture of High Pressure Boilers. The plant achieved its full annual
capacity to design manufacture and supply high pressure boiler equipment up to 4000 MW in
1984 with boiler unit ratings up to 500 MW.

BHEL has over the years seen formidable growth in capacity, capability, turnover and
profitability. Product diversification has resulted in the development of new products enabling
BHEL to absorb modern technologies. Such innovations result in continuous updating of
manufacturing facilities to serve the customers in a more comprehensive way and for improving
quality and productivity.

Along with Seamless Steel Tube Plant (SSTP) (adjacent to the HPBP) are a Boiler Auxiliaries
Plant (BAP) at Ranipet (in the state of Tamil Nadu), a Piping Centre (PC) at Chennai in Tamil
Nadu and an Industrial Valve Plant (IVP) at Goindwal (in the Northern state of Punjab).

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HPBP and SSTP are spread over 2908 acres of land at Trichy and BAP over 1256 acres at
Ranipet. HPBP and SSTP have a covered shop area of 2,50,000 square meters and BAP Ranipet
has 47,000 square meters of covered shop area.

Competitors
 MSL
 Kalyani Steels
 ISMT

SSTP – IDENTIFIED KPIs

BHEL is the major customer for SSTP (~90%), rest is supplied to small players and some are
exported.

 Cycle time - Almost 1 month (30 to 45 days). If the necessity arises then they do it in 15
days. The cycle time also depends on the order made by BHEL. Currently SSTP has
orders for the next few years in advance. Hence this has made the future planning easier.

 Software used to support supply chain – SSTP has entered automation in some areas.
They have a separate department for modernization, which is taking care of the
technological advancements. SAP is used by the company for certain processes. Further
automation plans are in progress. Thus this helps in faster processing and transactions.

 Vendor Fixing - A team of experts are sent to the suppliers companies to do a thorough
inspection and they come and submit a report whether it’s good to sign a contract with
them. They give major importance to quality of product and delivery time. They give a
trial order to these vendors and note their performance on these criteria’s and rate them.
They see various criteria’s like

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 o Quality of product
o Manufacturing capacity and capability
o Financially sound
o Delivery time

 Delivery time - The customer and the supplier fix the delivery time based on the
customer requirements. Sometimes the tube is not available so at that time the supplier
fixes the delivery time.

 DPMO – SSTP has a edge over its competitors through quality. Much importance is
given for quality. Defects per million are reduced considerably over a period of time.
They have achieved 2-3 sigma level. Various quality improvement programs are
conducted regularly to ensure quality. Employees are trained effectively to ensure the
same.

These are the few KPIs identified for SSTP after understanding the various processes of the
company. The company is planning for an expansion in the next 3 years, which will
approximately double its production capacity. Hot mill modernization is also a part of its future
plans.

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 CONCLUSION

From the analysis of Supply Chain Management in manufacturing industries we found these
indicators play a crucial role in measuring the performance of Supply Chain Management

 Cycle time
 Software used to support supply chain
 Vendor Fixing
 Delivery time
 DPMO

Thus we suggest these indicators to be used to measure the performance as far as the Supply
Chain Management of Manufacturing Industry is concerned.

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 REFERENCES

 http://www.ap-institute.com/Key%20Performance%20Indicators.html
 http://www.economywatch.com/world-industries/manufacturing/india.html
 http://en.wikipedia.org/
 http://www.smartkpis.com/
 http://www.wisegeek.com/what-is-supply-chain-management.htm
 http://www.iimm.org
 http://www.supplychainmetric.com
 http://www.bheltry-spares.com
 Mr. Jayaprakash , AGM, Production (SSTP – Trichy)
 Mr. Martin Tigga, SDGM, Management Services (SSTP - Trichy)

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