Sustainability in Performance Management Systems for Supply Chain

Sustainability in Performance Management Systems for Supply Chain Management Lecturers: Thomas Liebetruth Summer School 2016 ŠKODA AUTO University Mladá Boleslav Czech Republic 1

Lecture Content Developments and Definitions for Performance Measurement and Management Systems (PMMS) Guidelines for Supply Chain PMMS Approaches for Supply Chain PMMS and the Integration of Sustainability Summary 2

Definitions Performance Measurement Is an analysis of both effectiveness and efficiency in accomplishing a given task. All evaluation is in relation to how well a goal is met (Mentzner/Konrad 1991. P. 33) Is the systematic assignment of numbers to entities (Zairi 1994, p. 3) Is the process of quantifying efficiency and effectiveness of action (Neely et al. 1995, p. 80) Focuses and coordinates the decision-making activities of the knowledge workers to whom a company has delegated decision making responsibility by designing, monitoring and evaluating coherent, comprehensive performance measures (Atkinson/Waterhouse/Wells 1997, p. 31) 3

Definitions Performance Measurement refers to the process or the associated activities of evaluating the performance Performance: efficiency and effectiveness of actions within a business context Performance Measures or Indicators: metrics used to quantify the efficiency and/or effectiveness 4

Bredrup’s Performance Management Model (1995) Plan: Performance Planning Performance Priorities Do: Performance Improvement Check: Performance Review Re-engineering Performance measurement (stable, temporary) Continuous Improvement Performance evaluation Act: Feedback loops upon performance gap External Requirements § Vision, Strategies § Stakeholder’s (Customers, Authorities etc. ) Requirements 5 Performance Reference § Comparative Benchmarking § External Audit § Customer Survey § Competitor Analysis Self Audit § Key process review

Spangenbergs Performance Management Model (1994) Performance Planning Design Organisation § Vision, mission, strategy § Organisational goals set and communicated Process/Function Team/Individual § Goals for key processes linked § Team mission, goals, values and to organisational and customer performance strategies defined needs § Individual goals, responsibilities and work-planning aligned with process/function goals § Organisation design ensures structure supports strategy § Process design facilitates efficient goal achievement § Teams are formed to achieve process/function goals § Job design ensures process requirements reflected in jobs Manage- § Continual organisation develop- § Appropriate sub-goals set, § Active team building efforts, ing Perment and change efforts process performance managed feedback, coordination and formance § Functional goals (in support of and quarterly reviewed adjustment (and organizational goals) managed, § Sufficient resources allocated § Developing individual Improvereviewed and adapted § Interfaces between process understanding and skills, providing ment) quarterly steps managed feedback § Sufficient resources allocated § Interfaces between functions managed Review§ Annual review, input into ing Perstrategic planning formance Reward- § Financial performance of ing Perorganisation formance 6 § Annual review § Function rewards commensurate with value of organizational performance and functional contribution § Rewards commensurate with value of organisation performance, and function, team and individual contribution

Performance Measurement and Management Systems Management System Goal System Organisational Structure Leadership System Processes PMMS Employees/HR … … Environment § § § 7 Business System Customers Suppliers Other stakeholders

Scope and Elements of Performance Measurement and Management Systems Performance Measurement and Management System Performance Measurement Instruments and Tools (KPIs, TCO, BSC etc. ) Performance Management Process External Sources § § 8 Stakeholder’s Requirements Performance Reference (Benchmarking, Competitor analysis etc. ) Business System

Guidelines for Supply Chain PMMS 1 Criteria for particular Performance Elements 2 Criteria for the Performance Measurement System or Instrument 3 Criteria for the Performance Management Process Validity Multidimensionality Robustness Understandable and evidence-based causeeffect-relationships Consistency with goals, business strategy and incentive system Availability of information Controllability Control-span adherence 9 Free of redundancies and inconsistencies Reliability of measurement process and acceptance by users Action orientation, usefulness and economy Liebetruth, T. Die Informationsbasis des Supply Chain Controllings, Köln (2005)

Mapping of Effect Mechanisms in PMMS Financial KPIs Process KPIs (delivery reliability, cost, inventory, quality) Effect-mechanisms? ? ? (existence and actual effects) Actions and optimisation measures (implementation of a small train, standardisation of interfaces and systems etc. ) 10

Process Improvement Principles Concepts/Instrume nts SMED Mass Customization Small Trains Valueorientation Local-for-local Outsourcing Business Process Reengineering 5 S Variant Management Pull-principle 11 Eliminate Kaizen /KVP Andon Process. Ownership Workflow. Management. Systems KPIs/ Performance Measurement DMS C-Parts Provider Standardize Automate Motivate Staff Embedded Systems Digitalize Create Transparen cy Just-in-Time Industry 4. 0/IOT Bundle Process. KPIs Just-in. Sequence KANBAN Change order Level/ Stabilize Time-Window-Management Vendor Managed Inventory X-Dock Parallelize Mobilize Heijunka Milk-Run Postponement Segment One-Piece-Flow Agile Projectmanagement/ SCRUM Business Continuity Reference-processes Material Handling Technology Interface. Management Total Cost of Ownership Poka Yoke Trainings RACI Jidoka

Example Effect-analysis of “time slots in goods reception” Processimprovement principle Effect on Time (e. g. lead Effect on Quality (e. g. Effect on Supply Chain Cost time) delivery reliability) - Avoidance of stall money by better predictability of deliveries Leveling Faster availability of incoming goods and increase of planning quality Decrease of risk if damaged Avoidance of waiting times at goods (due to long lead times) goods reception and wrong handling (due to overburden of employees overburden of staff) in goods reception Digitalisation Quicker availability and avoidance of double bookings due to userfocused Inputs in internet-basedtool Avoidance of physical and paper-based processes by internet-based-tool Increased process stability by avoidance of (manual) interfaces Motivate staff - Decreased absenteeism by lesser risk of overburden Lesser mistakes in peak times by equal distribution of work Create transparency 12 Lower waiting times by early assignment of delivery slots

Interfaces and Conflicts between Production and Logistics Interfaces (examples) • Purchasing/Distribution models (Just-in-time, Warehousing, consignment stock etc. ) • Transportation models such as milk-runs etc. • IT-interfaces and standards Logistics Conflicts (examples) 13 Production • Line-Back-planning and -optimization shifts problems from production to logistics • OEE in production with flexible planning vs. urgent deliveries and safety stocks in logistics • Logistics outsourcing reduces cost but creates additional interfaces

Overview Supply Chain PMMS KPIs Maturity assessments Balanced Scorecards (BSC) TCO/LCA Trends in Performance Management System? Value driver trees 14 Performance measurement systems

KPIs Keebler 1999 Metrics (average) Capture over average Capture under average Customer complaints, on-time Days sales outstanding, forecast Involved Trading delivery, over/short/damaged, returns accuracy, invoice accuracy, perfect and allowances, order-cycle-time, Partner (59%) order fulfilment, inquiry response time overall customer satisfaction Internal Focus (61%) Inventory account accuracy, order fill, out of stocks, line item fill, back Processing accuracy, case fill, cash-toorders, inventory obsolescence, cash cycle time incoming material quality Cost (61%) Outbound freight cost, inbound freight 3 rd party storage cost, logistics cost, inventory carrying cost per unit vs. budget, cost to serve Productivity (44%) Finished goods inventory turns, orders Units processed per time unit, product processed/labour unit, product units processed per transportation unit processed per warehouse unit Utilisation (42%) Space utilisation vs. capacity, equipment downtime 15 Equipment utilisation vs. capacity, labour utilisation vs. capacity

Information Elements Liebetruth 2005 Information (Average) Capture over average Capture under average Financial Metrics (70%) Actual cost vs. budget Cash-to-cash cycle, company value Strategic Level (40%) Compatibility of data-standards, extent of Accuracy of planning systems, supply chain, data-transparency, degree of uncertainty, cooperation compatibility of it-systems, trust, quality need, power distribution of interfaces, supply chain complexity (strategic level) Operative Level (63%) Inventory, delivery reliability (on time, in full), capacity utilization vs. Capacity, order lead time, customer satisfaction, network complexity (operative level) 16 Geographical distribution, efficiency potential, lead time potential, time-tomarket, reaction time to inquiries

KPIs Weber et al. 2012 Information (Average) Capture over average Capture under average Financial Metrics (70%) Freight cost, total logistics cost, inventory carrying cost, cost of administration in logistics Cost of mistakes, customer profitability, turnover per working hour Strategic Level (40%) Customer complaints, customer satisfaction Returns, reaction time to inquiries, accuracy of billings Operative Level (63%) Delivery reliability (on time, in full), turn rate, inventory account accuracy, labour utilisation vs. capacity, space utilisation vs. capacity Order lead time, downtimes, orders processed per time unit, units processed per time unit, equipment utilization vs. capacity, orders processed per employee, units processed per employee 17

KPI Definition sheet KPI Delivery Reliability Objective Customer satisfaction: to provide customer with products at the confirmed date of fulfilment at the first attempt to 100% Definition Delivery reliability is the degree of the agreement between the guaranteed respectively confirmed date of fulfilment and the actual date of fulfilment Calculation Reporting/ Responsible Figures (actual, past, target) 18 Number of orders that are fulfilled on confirmed date (No deviations) Total number of orders * 100 Unit [%] Monthly / Mr. Jones (ABC 12) FY 15 (actual) 99. 2 Fy 14 99. 0 Target 99. 5 Weber, J. Logistik und Supply Chain Controlling (2002), p. 66.

Total Cost of Ownership End-of-life Cost Usage Cost Acquisition Cost • • • Obsolescence • Project Termination cost • • • Inventory • • • Warranty • • • Sourcing cost • Price of product or service Disposal Clean-up Conversation Scrap • Administration cost Freight Installation Training Taxes Purchase Price 19 Handfield, R. B. ; Monczka, R. M. ; Giunipero, L. C. ; Patterson, J. L. Sourcing and Supply Chain Management, South-Western Cengage Learning, 2011, p. 461 • • Downtime Opportunity cost

Value Driver Trees Profit contribution I EBIT Value added - Delivery reliability Cost of products - - Net turnover Structural cost Complaints Logistics cost Lead time WACC Cost of capital Delivery capability x Fixed assets Inventory + Current assets Operative assets 20 Controller Akademie Sales forecast Ordering behaviour # of orders that could not be delivered at the requested date (% of all orders) # of orders that could not be delivered at the promised date (% of all orders) # of complaints in relation to product or logistics (% of all deliveries) % of logistics cost in relation to net turnover Time between order and delivery (in days) Amount of fixed assets (in relation to benchmark) Stock turnover (times) Relation between forecasts and actual sales # of orders in relation to turnover of customer

Balanced Scorecard … 21 Measures Targets … Customers Objectives … Measures Targets … … Vision and Strategy Objectives … … Initiatives … Operational Excellence What must we excel at? Objectives Can we continue to improve and create value? How do customers see us? How do we look to our shareholders? Financial Objectives … Innovation and Learning Objectives … Measures Targets … … Ob-jectives … Measures Targets … … Objectives …

Example Strategy Map Airline Metric (Goal) Financial Perspective Less planes Profit Higher Turnover More clients Client Perspective Process Perspective Resource Perspective 22 Lowest prices Punctual service Faster turnaround on ground Implement job “plane ground manager” Training for employees • ROA (> 10%) • Turnover/seat (+20%) • Leasing cost (-5%) • • • Initiatives (Budget) # Clients (+ 12% p. a. ) • Implement CRM Syst. (xxx M€) FAA ranking • Implement TQM Syst. (xxx punctuality (#1) M€) Client ranking (#1) • Implement Loyalty program (xxx M€) • Project Optimisation ground handling time (xxx Punctual takeoff (90%) M€) Ground time (30 min) • Training ground staff (xxx • Job readiness (1 st year: M€) 70%, 2 nd 90%, 3 rd • Implement system for staff 100%) scheduling (xxx M€) • Ratio of employee • Employee shareholders (100%) program (xxx M€)

Maturity-Assessments Structure Content Assessment Evaluation logic: What is the maturity level definition? How does the scoring logic work? Topics/functions: What are the covered topics? How are best practices integrated? Methodology: How is the assessment done? Who are assessors? How is feedback given? e. g. : CMMI 23 e. g. Development Basic Ideas • Definition of requirements in a standardised evaluation grid on the basis of a defined assessment process • Stand-Alone-Evaluation or Benchmarking of different organisational units or processes • Identification of gaps for further development z. B. SCAMPI

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