I had the good fortune of being able to help the CEO of a manufacturing firm a few years back to address the firm’s “Supply Chain Financial Performance”. The scope of the supply chain, in this situation, was the end-to-end process from product design through placing the product “in service” at the customer’s location.
Before launching into the actual work, the CEO and I had to achieve an agreement with the senior staff that a financial problem with the supply chain existed. We were able to do this not by stating the problem in a conclusive manner, but by stating hypotheses – conjectures that would need to be validated or refuted. Typically, one cannot dismiss an hypothesis without documented facts and data.
The CEO and I came up with these two hypotheses.
- Improvements to our firm’s supply chain can drop significant financial benefits (revenue and cost) to the bottom-line.
- With a laser-focus on the supply chain’s financial metrics, specific improvement initiatives can be launched and executed to realize those benefits.
Being hypotheses, the senior staff could object and push back. But in order to prove or refute these hypotheses, facts were required. The staff could do nothing else, but accept the hypotheses as statements to validate or refute.
The Leaky Pipe
As an aid during the work, we used the metaphor of the supply chain being a pipeline through which material flowed. Opportunity for improvement exists if there are leaks in the pipe. This “leaky pipe” formed a great tool for the senior staff to visualize the opportunity.
A Supply Chain’s Key Financial Metrics
Below is a set of financial metrics for a supply chain ranging from the cost to produce a product by design to the cost of substandard quality to logistical cost, both inbound and outbound. What executives need to keep in mind is ineffective supply chains impact both cost and revenue.
From this set of metrics, the senior staff selected the key ones on which to focus during our efforts to improve financial performance. This selection was done with input from employees working throughout the supply chain including managers and front-line team members.
Here is the approach we used for identifying and fixing supply chain issues from a financial metrics point-of-view. Three major stages were analysis, targeting, and execution.
Analysis began with selecting key financial metrics which, when improved, would drive the most significant improvements to the firm’s bottom-line and hence, to shareholder value. Analysis proceeded by determining the As-Is values of the metrics and then identifying issues along the entire supply chain that impact those financial metrics.
Targeting was straightforward. Probably the most important step in this stage was the final one: assigning accountabilities for hitting the financial targets. Specific financial metrics were assigned to a single executive. And we formulated a shared goal. Individual and shared goals were linked to individual performance evaluations.
Execution is where the rubber meets the road. We found cross-functional teams using a structured 7-step problem solving process worked best. It was important that each team member was effectively trained in the problem solving approach so a common framework and a common language exist. A cross-functional team was established for each targeted financial metric.
A program management structure was overlaid for coordination, integration, and synchronization of the teams throughout problem solving and implementation. In this case, a Program Management Office (PMO) was established with additional accountabilities for training, communications, opportunity logging, business case development, financial calculation support, and benefits tracking.
So How Did We Do?
The leaky pipe and the two hypotheses proved to be useful aids in aligning the senior staff to the need to address the financial implications of an inefficient supply chain. Leveraging input from employees, the staff selected “Cost of Quality” and “Cost of Inventory” as two broad categories to address.
Assigning accountabilities for achieving targeted improvements had a unique twist. Cost of Quality was assigned to the head of Sales; Cost of Inventory was assigned to the Chief Financial Officer. These assignments emphasized the requirement for a cross-functional approach.
Cross-functional teams were formed. A PMO was established. And significant reductions in inventory and root causes of quality issues were realized over an eight-month period.
The Minimum Takeaways
- Start by aligning senior staff to the idea that opportunities exist to capture financial benefits (cost and revenue) through addressing supply chain issues
- Select the financial metrics that will have the greatest impact to improving shareholder value
- Form cross-functional teams, one for each financial metric being targeted for improvement
- Establish mechanisms and processes, such as a program management structure, to integrate output from all the teams and track benefits
- Communicate and celebrate wins throughout the organization