11 Apr How Would Steve Jobs Connect the Dots in Your Supply Chain?
During Stanford University’s June 2005 commencement speech, Steve Jobs shared “You can’t connect the dots looking forward; you can only connect them looking backwards.” Though Jobs went on to speak about character providing inspiration to the graduates, this quote can also relate to how we should look at improving supply chain metrics that have correlation. With an increase in data and the sources of information, a new means for business value can be achieved by correlating a group of supply chain metrics from disparate systems to provide insight and cause/effect relationships. We can then “connect the dots” between what’s called indirect KPIs versus direct KPIs.
First, let’s review the difference between direct and indirect KPIs:
1. Direct KPIs are the metrics which result from drilling down or drilling up on metrics. In a typical supply chain organization, one example of a direct KPI is Inventory with sub-metrics like raw material, work in process, and finished goods. Inventory can be evaluated at any time as we add each of these sub-metrics together, or drill down further as needed. Another example of a direct KPI is Revenue… where we can drill down and further evaluate by division, location, etc. Most supply chain analytical systems work with metrics in this manner, since the data is collected from the same system rolled very straightforward.
2. Indirect KPIs are those which impact other metrics but NOT found within a straightforward “drill-down” or “drill-up” manor. These are metrics which correlate to or impact other KPIs. Indirect KPIs are much harder to determine (versus simply adding up numbers in our earlier inventory or revenue examples). The power of using indirect KPIs though provide amazing insights into issues and drive improvements.
Normally, direct KPIs can tell a business what happened; whereas indirect KPIs help organizations learn what to do differently by connecting the dots to determine factors which truly impact performance. So now is time to ask: “How can we connect the dots?” First, start with tribal knowledge. Ask some basic questions about the key metrics which need improving and any general knowledge of what impacts them:
What causes product to be late?
Is it delays in manufacturing?
Each of the potential reasons open up a new set of KPIs. Rather than continuing infinitely, drill down and across into the metrics until a set of actionable KPIs can be focused upon. Once the dots are connected on a metric that can impact the business, determine the data source for all the metrics in the Indirect KPI trail of dots. Think out of the box on this trail of dots – these may not be static data sources (your ERP system, your accounting system, etc.). An important factor is how often these metrics are refreshed. If one KPI is refreshed in real-time and another is refreshed on a quarterly basis, the accuracy and actions-to-take may be harder to develop.
Think of this case study… a global manufacturer called “Ghostly Spirits” is struggling with Adherence to Plan (ATP). This metric defines if the date and quantity of finished product received by a distribution center was the actual plan. One of the direct KPIs of Adherence to Plan is Inventory. A direct KPI of Inventory is raw material (the glass bottles in which this company’s spirits are contained for sale). Since raw materials look high, we access data and metrics from manufacturing and supplier management and determine a reason for high raw materials is because of poor supplier quality, causing ATP to fall short. By managing Indirect KPIs, we find that supplier quality inconsistency is adversely affecting Adherence to Plan.