Retire the Functional KPIs: End-to-End Supply Chain Planning Requires End-to-End KPIs

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It has become more obvious than ever during the pandemic that end-to-end supply chain planning is vital to managing our supply chains. Through the years, it has proven a tough task to truly do end-to-end planning, so many companies are still on the journey of making this a reality. Similarly, it has proven important that all our planning layers — from strategy to execution and back — are linked closely together as planning decisions made within different horizons may affect each other. During the beginning of the pandemic, we suddenly saw supply chain configuration decisions This strengthened the need for alignment between the different planning layers.

When we speak to companies about supply chain planning, we often touch on the topic of KPIs since they drive a lot of behavior. KPIs have traditionally been functional, measuring demand planning, inventories and costs at different levels of the supply chain. This has worked fine in the past since the planning was also done in a functional, sequenced manner. However, when we want to do end-to-end supply chain planning, our KPIs must support this. Based on conversations with several companies, it seems that even though we want to do end-to-end planning, we still experience many functional KPIs in the different organizations — maybe even with end-to-end KPIs on top of these.

Companies should review their KPI portfolio and design metrics to ensure they support achieving their strategic supply chain goals, including their supply chain planning ambitions. This will require that certain KPIs be retired as they no longer serve their supply chain ambitions, while other KPIs should be redesigned to fit to an end-to-end planning environment. When viewing the hierarchy of supply chain metrics below, this is especially true for the lower part of the hierarchy — “operational effectiveness.”

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Examples:

If you have implemented or are going to implement multi-echelon inventory optimization (MEIO) to calculate safety stock levels across your supply chain, then you must be careful to still measure inventories separately in different categories (raw materials, work-in-progress and finished goods). That’s because MEIO is designed to holistically optimize safety stocks in the end-to-end supply chain with the objective of maintaining a certain service level toward end customers with as low overall inventory costs as possible. This means that it may size inventories skewed through the supply chain because that might provide the best balance across — for example, so you are suddenly seeing higher raw material levels compared to WIP and finished goods. If you are then measuring siloed on the different inventory types, it will appear as if something is completely wrong with the raw material inventory levels, but that’s not the case as this is a conscious trade-off decision.

It’s similar when measuring plant utilization at different plants. Again, you must look at this from an end-to-end supply chain perspective and consider that different plants may serve different purposes; some focus on efficiencies while others focus on flexibility/agility. This requires differentiated target settings as the output of the flexible plants will always be lower than the efficiency-focused plants. A company might be unaware of this environmental difference, which may depend on which markets a factory serves and the resulting product portfolio mix.

It’s hard to retire the KPIs that we have used for years. These measurements make us feel secure and in control. But to truly do end-to-end planning and have the organizational support behind it, it is essential to have KPIs that support this way of planning. Otherwise, end-to-end planning will remain just a dream.

Pia Orup Lund
Director Analyst

Gartner Supply Chain
[email protected]

 

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