Monthly Archives: May 2009

The Hierarchy of Supply Chain Metrics

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A classic article in the Supply Chain Management Review discusses the hierarchy of supply chain metrics because measurement is the cornerstone of operational success. According to the article, which builds on AMR Research, the best approach to measurement uses a three-tiered hierarchy that allows managers to quickly assess overall supply chain health at the top level, diagnose problems at the mid-tier, and identify corrective actions at the ground level.

At the top level, there are three core metrics that allow a manager to quickly gauge the overall health of the supply chain:

  • Demand Forecast Accuracy
  • Perfect Order
  • SCM Cost

At the next level, a composite cash-flow metric provides a diagnostic tool that allows a manager to zero in on the components that are likely the cause of any inefficiencies. The metric allows managers to determine whether there’s a balance between the time it takes suppliers and the time it takes customers to pay, whether the inventory metric (which can contribute to high costs) needs further analysis, and whether cash flow is being appropriately managed. The metric consists of:

  • Accounts Payable Turnaround Time
  • Inventory Totals
  • Accounts Receivable Turnaround Time

At the bottom level are the day-to-day metrics that measure performance across the different supply chain management activities and allow root-cause analyses when one of the higher-level metrics indicates a potential problem with efficiency or cost management. These metrics measure supplier effectiveness, operational effectiveness, and cost management effectiveness and include:

  • Supplier Quality
  • On-Time Delivery
  • Remaining Inventory
  • Purchasing Costs
  • Direct Material Costs
  • Production Schedule Variance
  • Plant Utilization
  • Work-in-Process Inventory
  • Order Cycle Time

Utilized properly, the hierarchy can lead to great success. However, companies can face significant challenges when designing and implementing measurement programs. The article offers seven recommendations for tackling the challenges that will arise:

  • Follow these four universal principles
    1. Keep it Balanced
    2. Work from the Outside In
    3. Focus on the Outcome
    4. Use the 80/20 rule and don’t choose too many metrics.
  • Proactively address organizational resistance
  • Beware of tunnel vision and ensure the metrics you choose address interactions and interdependencies
  • Analyze root causes when issues arise
  • Use a top-down approach to analysis
  • Measure enablers
  • Measure in the context of a performance-management program

Some Fraud Prevention Steps from Oversight Systems

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The Shared Services & Outsourcing Network recently ran an article on their Q&A with Patrick Taylor of Oversight Systems which covered some steps your organization can take to prevent fraud. Given that each incident of fraud costs you $441,000 on average, every bit of advice helps — especially since most fraud losses are internal in an average organization.

  • Clearly define your entry and reporting requirements.

    Make sure each transaction is verified with supporting documentation. No expense report without matching receipts, no payment without a verified invoice and matching goods receipt, and no large wire transfers without a contract and a (e-)paper trail.

  • Implement good controls that cannot be easily, or autonomously, overridden.

    Two or more approvals should be required for every payment that is off contract, that is for goods redirected to a non-standard location, or that is to a new vendor. The need for collusion reduces the risk of fraud.

  • Implement a continuous auditing system that examines every transaction.

    A system that examines, and re-examines, every transaction looking for unusual entries or unusual patterns is much more likely to find fraud than a random audit of the books. Are you going to detect all duplicate payments? Are you going to notice the same expense report submitted six months in a row? Are you going to notice six installment payments to a contract that was only supposed to have three if you don’t have immediate access to the contract? Are you going to notice repeated payments to the company of your employee’s brother for “miscellaneous services” that are a couple of months apart? Probably not … but an appropriately implemented transaction monitoring system that supports a range of user defined rules and a best-practice artificial intelligence will.

Slime in the Sunshine

Editor’s Note: This is Norman Katz‘s first post as a regular contributor on Sourcing Innovation. (His previous guest posts are still archived.) Norman, who has published dozens of articles on the subject, is a supply chain fraud and supply chain risk expert and will be covering these topics in his new column. He recently started a newsletter, and past issues are archived.

Ah — the innocence of youth, now lost to me forever. When I consider what I know now and have experienced, would I be happier not knowing or am I glad I have a better understanding of how the world works and some of the directions it has gone? Well, if to be forewarned is to be forearmed, I’m happy for the insight, as it has allowed me to become quite proficient in fighting for my rights as a consumer against various product companies and such “untouchable” titans as the cable, telephone, power, mortgage, financial, and insurance companies I’ve be a customer of over the years who have attempted to perpetrate their own brands of fraud against me. I will not settle for poor customer service, and have found ways around those entities, complaining to “higher authorities” and getting noticeable results. I’m saddened that they’ve likely gotten away with it against lesser-experienced consumers who lack the knowledge and fortitude to stand up for their rights, as this seems to be more and more the norm for “customer service”.

I live in South Florida, which is considered to be the counties of Miami-Dade (major city: Miami), Broward (major city: Fort Lauderdale), and Palm Beach (major city: West Palm Beach). Sometimes Monroe County (major city: Key West) is included.

It’s pretty tough to get people from one county to drive to an event in another county unless they are already close to the county line. People from Palm Beach and Broward seem to bristle at being lumped into the “Miami” metropolitan classification, at least when it comes to some of the more glaring statistics about this area:

  • In 2006 & 2007, Miami was ranked # 1 in mortgage fraud; even in 2009, we’re holding our own in one of the top 5 spots nationally.
  • In 2007, Miami had the 2nd highest rate of foreclosures nationally, and we’re still holding our own as a top-five contender nationally here too.
  • In 2008, Miami was ranked # 1 in Medicare fraud, and I see no sign of us losing this ranking anytime soon.
  • In 2006 and 2007, Miami was ranked # 1 nationally for rudest drivers, and I see us holding this ranking for many years to come.

I recall a year or two after moving down here, the FBI indited the entire Miami city commission with fraud and criminal charges and all commissioners were removed from their positions. Even today, between all three counties, public servants — notably commissioners — or their spouses are being caught breaching ethical guidelines as well as laws, such as Florida’s Government “In The Sunshine” law which ensures that the public may inspect any state, county, and municipal record, and that providing access to these records is the responsibility of each individual agency, and that business must be conducted “in the sunshine” (not behind closed doors).

And now South Florida is in the running to add another notch to its national ranking belt: a leader in pain clinics which dispense oxycodone and other such pain medicines, dealing mostly in cash and offering doctors five and six-figure monthly incentives to write prescriptions, often dispensed from their own in-house pharmacies. On the up-side, this looks like it has increased the out-of-state tourist traffic, a boon during the sour economic times.

Is it any wonder why the subject of fraud interests me so much? I’m completely surrounded by it!

For years I wondered why South Florida seems like such a magnet for all these different kinds of frauds, bad behavior, and weird events that seemingly no other area in the country suffers from, and then I discovered the answer: Miami is — in fact — one of the corners of the famed Bermuda Triangle. Well … I can’t think of a better and more comprehensive explanation that that.

Norman Katz, Katzscan

Welcome to Sourcing Innovation, Norman.

Characteristics of a Well Organized Supply Chain

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A recent article on the Supply Chain Brain site by Enporion did a great job of outlining the necessary requirements for organizational success in your supply chain. Even though a center-led model is usually optimal, as it lets you take advantage of the best aspects of the centralized and decentralized organizational models, it’s only truly optimal if:

  • The Organizational Model Fits the Corporate Strategy
    Successful supply chain organizations are designed to specifically address where strategic decision are made and the knowledge that is needed to make those decisions.
  • The Organizational Model Fits the Corporate Culture
    Successful supply chain organizations match the actual corporate culture, not an imagined one, and feel natural to the people who bring the model to life.
  • The Organization Model Accounts for Staff Skills and Expertise
    The model is designed to make sure that the right people are in the right job in the right numbers at the right place at the right time.
  • The Governance Structure Elevates the Supply Chain Function
    Leaders of successful supply chain organizations sit at the table with the rest of the C-level executives.
  • There are Mechanisms that Enable Collaboration and Communication
    Supply chain staff are close to the operations and business units and communicate regularly with cross-functional teams, category teams, supply councils, executive committees, and other stakeholders.
  • The Information Systems Support the Function
    The technology meets the need of the organization.

Jim Lawton on Avoiding Supply Chain Disruption

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Jim Lawton, Sr. VP & General Manager of D&B Supply Management Solutions, who guest posted on winning the battle on risk: information and technology here on Sourcing Innovation recently penned a great article for Industry Week on understanding risk and avoiding supply chain disruption. According to Jim, avoiding supply chain disruption basically boils down to three steps:

  • get the data,
  • go beyond the finances, and
  • proactively manage the supplier base.

The first challenge of supplier risk management is compiling all supplier information into one centralized location. Since supplier information in most companies exists across dozens — if not hundreds — of systems, this is never an easy task. However, once the data is centralized, it can be used to drive predictive indicators that give insight into supplier viability as far out as 12 months in the future. Furthermore, manufacturers can determine the criticality of each supplier (and determine which suppliers need to be monitored most closely) by asking the following questions:

  • What need does the supplier fill?
  • How essential is the supplier to overall supply chain operations?
  • How does the supplier fit into the corporate plan for supplier diversity and sustainability?
  • What would happen if we lost the supplier?

Then — because risks come in many shapes, including operational, managerial, and geographic — manufacturers can go beyond the financial assessment and look at other factors that could be a cause for concern, which might include:

  • changes in the supplier’s management team
  • quality issues
  • noticeable lags in inquiry response time
  • EPA violations
  • OSHA incidents
  • OFAC violations

Finally, they can actively manage the supplier base to minimize risk, starting with forward-looking supplier scorecards that are designed to detect risks before they materialize and help the manufacturer work with the supplier to improve their operations and prevent disruptions.

Good stuff.