KPIs Improving Supply Chain Performance Management Northeast Supply

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 Total product cost Performance to schedule Product reliability and consistency 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 Chain • Implement Strategic Sourcing (SSI) Trade Practices Financial Practices Source: “Jim Kilts Is An Old-School Curmudgeon”, Fortune, December 30, 2002 KPIs sustain strategic sourcing savings

What is Indirect Spend? • • • Computer/Telecom Energy/Utilities Printing/Marketing/Advertising Employee Benefits Office Products MRO • • • Travel Facilities Professional Services Fleet Logistics Capital Equipment 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 ($ Millions) Utilities/ Engineering Construction Source: CAPS Critical Issues Report, September 2003 Consumer Products Aerospace, Defense, Do. D and Do. E Contracting

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 = $434 M Total Indirect Goods 21% Marketing IT Pro Services Construction/Eng Services 33% Inventory Manufacturing Direct Material 51% Source: Defining and Determining the “Services Spend” in Today’s Services Economy, CAPS, July 2003 Other: Accounting Facilities Legal Logistics Real Estate Temp Labor Travel

Participants in a recent CAPS survey expect indirect spend for services to increase Indirect Spend - Services ($ Millions) 5 -yr CAGR = 5% Source: Services Purchases: Not Your Typical Grind, Inside Supply Management, September 2003 Note: Chart represents respondents’ median spend = Projected

Developing KPIs for Indirect Suppliers

Evaluation criteria for indirect suppliers can be grouped into three categories Contract Compliance Customer Satisfaction Cost Competitiveness and Continuous Improvement Definitions of Supplier Criteria • How well does the supplier deliver on the terms, conditions and prices agreed to in the contract? • How well does a supplier satisfy our customers from a product or service quality perspective? • • How well does the How cost competitive is the supplier continue to enhance the supplier from an industry perspective product/service, and from a historicalprocess or cost? 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 Compliance Customer Satisfaction Cost Competitiveness and Continuous Improvement Attributes • • • Actual cost vs. budget SLA responsiveness On time deliveries Return rate Order and billing accuracy Average lead-time • • Customer Surveys Technical Support • • Supplier vs Partnership Industry Supplier vs Other. Initiative • Cost Reduction Benchmark Target Ecommerce capability 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 Compliance Customer Satisfaction 30 -50% 20 -30% Cost Competitiveness and Continuous Improvement 30 -50% = 100% Standard Scores 5 4 3 2 1 = = = Superior – far exceeds expectations Exceeds expectations Meet expectations Does not meet expectations 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 measured in regards to damage or breakdown, and is difficult to measure for services • Strong traditional supplier KPI data does not necessarily indicate whether or not the customer is satisfied Customer Satisfaction Surveys provide mechanism to help evaluate supplier performance

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 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 4 3 2 1 = = = Superior – far exceeds expectations Exceeds expectations Meet expectations Does not meet expectations Significantly does not meet expectations 6% or more 4 – 6% 2 – 4% 0 – 2% 0%

Collecting the Data

Evaluate the costs/benefits of each data collection method available Unbiased company collected data electronically Cost to collect data Recommended approach 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 Third-party data Supplierprovided reports 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

An overall score is calculated and used to measure indirect suppliers’ performance Indirect Supplier Evaluation Criteria Contract Compliance Cost Competitiveness and Continuous Improvement Customer Satisfaction Weight X Score = Indirect Supplier KPI Score • • Weight = 30% Score = 4. 3 • • Weight = 40% 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 • What gets measured, gets done. Be clear on what you’re measuring and why. • Develop jointly with suppliers to achieve buy-in • Align KPIs with your goals and objectives • Develop KPIs that are objective and measurable • Limit KPIs to a manageable number • Communicate results to suppliers and management on a timely basis Business Benefits • Generates supplier improvements that benefit you • Justifies supplier’s inclusion in your supply base • Identifies need to re-source supplier • Strengthens and improves supplier relationships • Develops suppliers • Rewards for performance • Complete the process and follow-up on results and corrective actions KPIs drive continuous improvement and cost savings

Questions