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

Product reliability
Total product cost Performance to
and consistency
schedule

KPIs are measurements of a supplier or service provider’s

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 • Implement Strategic Sourcing
Chain
(SSI)
Trade
Practices

Financial KPIs sustain strategic sourcing

Practices savings

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

What is Indirect Spend?

• Travel
Computer/Telecom
• Energy/Utilities
Facilities
• Printing/Marketing/Advertisin
Professional Services
• g
Fleet
• Employee
Logistics Benefits
•• Office
CapitalProducts
Equipment
• MRO

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 Indirect

$700
$600
$500
$400
$300
$200
$100
$0
Group Total Utilities/ General Consumer Chemical/Petroleum Aerospace,
($ Millions) Engineering Manufacturing & Products Defense, DoD
Construction Mining and DoE
Contracting

Source: CAPS Critical Issues Report, September 2003

Spend for services accounts for more than half of a
company’s indirect spend

Purchase Spend as a Percentage of Total Purchase Spend

Median spend = $434M
Total
5% Marketing
5% IT
6% Pro Services
Indirect 8% Construction/Eng
Goods Services
21% 8% Inventory
33%

20% Manufacturing

Direct
Material Other:
Accounting
51% Facilities
Legal
48% Logistics
Real Estate
Temp Labor
Travel

Source: Defining and Determining the “Services Spend” in Today’s Services Economy, CAPS, July 2003
Participants in a recent CAPS survey expect
indirect spend for services to increase
Indirect Spend - Services
($ Millions) = Projected
5-yr CAGR = 5%

$529
$502
$478
$456
$434

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 Customer Cost Competitiveness and
Compliance Satisfaction Continuous Improvement

Definitions of Supplier Criteria

•
How well does the •
How well does a •
How cost •
How well does the
supplier deliver on supplier satisfy competitive is the supplier continue
the terms, our customers supplier from an to enhance the
conditions and from a product or industry perspective product/service,
prices agreed to in service quality and from a process or cost?
the contract? perspective? historical
perspective?

Ultimate objective is to be able to quantifiably measure and compare

individual supplier’s performance
Specific KPIs can be tailored to meet the needs of
various suppliers
Contract Customer Cost Competitiveness and
Compliance Satisfaction Continuous Improvement

Attributes
•
Actual cost vs. •
Customer •
Supplier vs •
Supplier
budget Surveys Industry Partnership
•
SLA •
Technical •
Supplier vs Initiative
responsiveness Support Other •
Cost Reduction
•
On time deliveries Benchmark Target
•
Return rate •
Ecommerce
•
Order and billing capability
accuracy
•
Average lead-time

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 Customer Cost Competitiveness and
Compliance Satisfaction Continuous Improvement

30-50% 20-30% 30-50% = 100%

Standard Scores
5 = Superior – far exceeds expectations
4 = Exceeds expectations
3 = Meet expectations
2 = Does not meet expectations
1 = 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 supplier’s 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 Customer
measured in regards to Satisfaction
Surveys provide
damage or breakdown, and mechanism to
is difficult to measure for help evaluate
services supplier
• Strong traditional supplier performance
KPI data does not
necessarily indicate
whether or not the
customer is satisfied
Customer Satisfaction Surveys capture the customer‘s
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.
Scale:
– 1: Strongly Disagree
– 2: Disagree
– 3: Neutral
– 4: Agree
– 5: Strongly Agree

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

• Customer satisfaction tends to be
overwhelmed by bad experience,
even if the bad experience was
not the supplier‘s 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
• 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
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 = Superior – far exceeds expectations 6% or more
4 = Exceeds expectations 4 – 6%
3 = Meet expectations 2 – 4%
2 = Does not meet expectations 0 – 2%
1 = Significantly does not meet expectations 0%
Collecting the Data
Evaluate the costs/benefits of each data collection
method available

Unbiased
company
collected data
electronically
Recommended Cost to collect
approach data

Data collected /
tracked by
supplier

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 Supplier-

provided
reports
Third-party
data
Industry
benchmarks
Customer
Satisfaction
Surveys

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 : Target Actual Weighted

ABC Staffing Performance Performance Weight Score
Contracts Compliance 4.0 4.0 30% 1.20
Customer Satisfaction 4.0 4.3 30% 1.29
Cost Competitiveness/
Continuous Improvement 4.0 3.5 40% 1.40

OmniMark Cutoff 4.00

Vendor Score 3.89
OmniMark Eligible No

SUPPLIER: ABC Staffing

Contract Compliance Customer Satisfaction
Customer Satisfaction Cost Competitiveness Continuous
ContinuousImprovement
Improvement
Metric Act Score Weight Weighted Metric Act Score Weight Weighted Metric Act Score Weight Weighted Metric Act Score Weight Weighted
Confirmation of Order Delivery w/i 2 hours Candidates Received Survey (beginning of process) Base Pay Rates vs. Benchmark "Recruited"
Superior 100% 5 0.1 0
Systems Upgrades / Process Improvements Implemented
Superior 100% 100% 5 0.3 1.5 Superior Fav >=5% 5 0.25 0
Excellent 95-100% 97% 4 0.1 0.4 Excellent >=90% 4 0.3 0 Superior Fav >=10% 11% 5 0.25 1.25
Excellent Fav <5% 4 0.25 0
Good 92-95% 3 0.1 0 Good >=80% 3 0.3 0 Good Parity X 3 0.25 0.75
Excellent Fav >5% 4 0.25 0
Needs Improv 90-92% 2 0.1 0 Needs Improv >=70% 2 0.3 0 Needs Improv Unfav <=5% 2 0.25 0 Good Fav < 5% 3 0.25 0
Not Acceptable <90% 1 0.1 0 Not Acceptable <70% 1 0.3 0 Not Acceptable Unfav >5% 1 0.25 0 Needs Improv None 2 0.25 0
Qualified Resumes Received w/i 24 hours Temporary Attendance Rate
Not Acceptable Unfav 1 0.25 0
Markup Rates vs. Benchmark (SSI Target = 30%)
Superior 100% 5 0.4 0 Superior 100% 5 0.2 0
Excellent 97-100% 98% 4 0.4 1.6
Superior Fav >3 BP 5 0.2 0 Base Pay Rate Savings Methodologies Implemented
Excellent >=90% 90% 4 0.2 0.8 Excellent Fav 1-3 BP 4 0.2 0
Good 95-97% 3 0.4 0 Superior Fav >10% 5 0.2 0
Good >=80% 3 0.2 0 Good Parity < 1BP Fav 0.5 3 0.2 0.6
Needs Improv 92-95% 2 0.4 0 Needs Improv >=70% 2 0.2 0 Excellent Fav >5% 4 0.2 0
Not Acceptable <92% 1 0.4 0 Needs Improv Unfav <3 BP 2 0.2 0 Good Fav < 5% X 3 0.2 0.6
Not Acceptable <70% 1 0.2 0
Not Acceptable Unfav >3 BP 1 0.2 0
Selected Candidates Available w/i 72 hours Needs Improv None 2 0.2 0
Temporary Turnover Rate
Superior 100% 5 0.3 0 Pass-Through Costs Not Acceptable Unfav 1 0.2 0
Superior 0% 5 0.1 0
Excellent 95-100% 97% 4 0.3 1.2 Superior Fav >=5% 5 0.05 0
Excellent <=2.5% 2.0% 4 0.1 0.4 Pass-Through Cost Methodologies Implemented
Good 90-95% 3 0.3 0 Excellent Fav <5% 4 0.05 0
Good <=5.0% 3 0.1 0
Needs Improv 85-90% 2 0.3 0 Good Parity X 3 0.05 0.15 Superior Fav >10% 5 0.05 0
Needs Improv <=10% 2 0.1 0
Not Acceptable <85% 1 0.3 0 Not Acceptable >10% 1 0.1 0 Needs Improv Unfav <=5% 2 0.05 0 Excellent Fav >5% 4 0.05 0
Not Acceptable Unfav >5% 1 0.05 0 Good Fav < 5% 3 0.05 0
Consolidated Billing / Accuracy
Candidates Selected Survey (end of process) Needs Improv None 0% 2 0.05 0.1
Superior 100% 5 0.2 0
Superior 100% 5 0.4 0
Excellent 96-100% 97% 4 0.2 0.8 Comments Not Acceptable Unfav 1 0.05 0
Excellent >=90% 90% 4 0.4 1.6
Good 93-96% 3 0.2 0 Benchmark vs. previously paid on "recruited" talent
Good >=80% 3 0.4 0 Weighted Cat Avg 3.5
Needs Improv 90-93% 2 0.2 0 Cost of drug / background + other pass-throughs vs. competitors
Needs Improv >=70% 2 0.4 0
Not Acceptable <90% 1 0.2 0 Comments
Not Acceptable <70% 1 0.4 0
Value assessment of upgrades to process / systems employed
Weighted Cat Avg 4.0
Weighted Cat Avg 4.3 Base Pay Savings measured by market rate before / after agency input
Comments
Comments Pass-Through Savings vs. currently paying
Top 3 metrics covered by new T&A log
Survey should be all temp "managers"
Progress reviewed with supplier semi-monthly (initially)
Survey should not be anonymous
Each resume / position category is a "transaction"
"Received" survey for quality vs. minimum guidelines
"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 Customer Cost Competitiveness and

Compliance Satisfaction Continuous Improvement

Weight X Score = Indirect Supplier KPI Score

•
Weight = 30% •
Weight = 30% •
Weight = 40%
•
Score = 4 •
Score = 4.3 •
Score = 3.5

Indirect Supplier
KPI Score

EXAMPLE

3.89
Guidelines for developing KPIs
KPI Guidelines
• Determine criteria for identifying which
suppliers will be measured by KPIs Business Benefits
• What gets measured, gets done. Be • Generates supplier
clear on what you’re measuring and improvements that benefit
why. you
• Develop jointly with suppliers to • Justifies supplier’s inclusion
achieve buy-in in your supply base
• Align KPIs with your goals and • Identifies need to re-source
objectives supplier
• Develop KPIs that are objective and • Strengthens and improves
measurable supplier relationships
• Limit KPIs to a manageable number • Develops suppliers
• Communicate results to suppliers and • Rewards for performance
management on a timely basis
• Complete the process and follow-up on
results and corrective actions

KPIs drive continuous improvement and cost savings

Questions