“Focus on executing to Key Performance Indicators (KPIs).” This is the key piece of advice for navigating the recession from a top supply chain executive at one of the world’s largest consumer electronics firms (due to confidentiality, I can’t disclose the name of the company). The top-level supply chain KPIs at this company include cost, delivery performance, cash, and quality. These KPIs can be decomposed into lower-level supporting metrics. For example, the cash metric is supported by specific targets for inventory turns, Days Sales Outstanding, and Days Payables Outstanding targets.
Every year, a major focus for the company is reducing its global supply chain costs. In the first two fiscal quarters of this year, however, cost reductions surpassed the full year target by over 50 percent. Driven by the volatile market conditions, the supply chain team intensified its cost reduction efforts. A Lean Six Sigma program was an important driver in the team exceeding its aggressive cost targets. The company has used Lean Six Sigma processes to reduce portfolio complexity, simplify materials management, and reduce manufacturing cycle times. As an aside, some consultants and supply chain executives have told me that there is more money to be saved in reducing the number of diverse components used across different products than in reducing the number of final products produced. This company’s procurement team delivered material cost improvements that were 40 percent above target despite increased cost pressures stemming from industry wide commodity shortages on certain key components.
This company’s manufacturing process is designed with the goal of shipping products within four days of receiving an order. It takes an additional four days to deliver the order through the company’s global logistics supply network (the company’s factories are primarily in Asia, and North America is its biggest market). The company has made impressive improvements on this metric (delivery within eight days to large retail organizations) over the past three years. The global supply chain’s key delivery performance metric is evolving from being based solely on speed to a focus on executing to the first committed ship date. In other words, more reliable manufacturing performance upstream leads to less expediting and fewer heroic efforts downsteam in logistics.
The company has also made IT investments in the global logistics area. Faced with the economic downturn, the global supply chain team established stronger partnerships with fewer logistics service providers and they are in the process of better integrating their IT systems with their 3PL partner’s systems for better collaboration and order status visibility.
The cash conversion metric is an important KPI for the global supply chain team. A ‘Cash is King’ initiative was established to drive performance not only in the global supply chain organization but also across the sales and finance teams. This end-to-end effort helps to insure that Inventory turns, Days Sales Outstanding, and Days Payables Outstanding targets are met. With the volatile marketplace and customers and suppliers alike going out of business, strengthening the controls on this KPI has proven beneficial to the company’s bottom line. As a result, the global supply chain team has achieved best-in-class performance by improving cash conversion in the first fiscal quarter this year by 13 days compared to the previous year.
The company employs rigorous quality standards throughout its design and development processes, as well as its manufacturing processes. The first production runs test over 97.5 percent defect free across its product lines. To maintain high quality standards, the global supply chain team focuses closely on:
- An aggressive supplier audit program. The company frequently audits its suppliers’ facilities. These audits examine the manufacturing processes, check to see whether the supplier is working towards achieving the quality standards agreed to in the design review process, and check to insure compliance with local/regional environmental regulations and industry environmental standards.
- Maintaining 100 percent supplier testing and making sure its suppliers understand and adhere to all of its quality standards and processes.
And of course, the original focus of Lean and Six Sigma was quality and the company continues to use these processes for that purpose too.
In conclusion, “during the economic downturn, an intense focus on execution becomes the key to agility, efficiency and turning losses into profits.” While any company can apply these best practices at any time, in an unstable economy, this management approach takes on added emphasis and importance. While the company continues to have weekly meetings, with teams from order processing, procurement, manufacturing and logistics, to focus on the most critical objectives and appropriately balance the different KPIs when they are in conflict, the performance metrics are now also monitored daily in case midweek adjustments need to be made.