A New Approach to Measure Supply Chain Performance
As we kicked off our 2017 user conference this year in Chicago, there was one mandate that was on all of our minds: paving a path for brands and suppliers to work better together to deliver more for retail customers and end consumers. Perfectly executing on these demands has become more challenging in recent years, as product customization (or some level of localization) has become more prevalent, all while delivery windows get shorter and penalties get stiffer.
Our theme at Nulogy xChange this year was “GO Boldly Together”, placing emphasis on the necessity of effective brand/supplier collaboration in order to deliver “the perfect order” together. Central to this theme was keynote speaker, Kate Vitasek, a nationally recognized thought leader in the supply chain world, and expert on the perfect order. Vitasek is the founder, faculty, and lead researcher in the concept of vested (also known as vested outsourcing) and co-author of “Vested Outsourcing”, which focuses on creating highly collaborative relationships in the supply chain.
“For the last 10 years, I’ve devoted my time to this concept we call vested: how to create highly collaborative relationships,” she explained. “So many times when we talk about collaboration, we say ‘win-win,’ but we don’t actually get there. I want to share why the collaboration effort is so essential to achieving the perfect order.”
According to Vitasek, this effort demands a change in mindset that, once achieved, will change how supply chain performance is measured.
History and Math
The Supply Chain Council describes perfect order fulfillment as a discrete measurement defined as the percentage of orders delivered to the right place, with the right product, at the right time, in the right condition, in the right package, in the right quantity, with the right documentation, to the right customer.
“Fifteen to 20 years ago, fill rate was considered the gold standard in supply chain performance; but then the concept of the perfect order emerged,” says Vitasek. “But how do you measure that? What goes into it?”
The concept was pushed in an effort to drive down costs. Vitasek pointed to a study of a major retailer to make her point. Every time a barcode wasn’t correct on a product:
> Transactions are delayed approximately 3.5 minutes.
> Two additional customers are impacted.
> There’s 79 percent shrink for every no mark occurrence.
> Issues are incorrectly resolved 28 percent of the time.
> In 39 percent of instances, the person at the register has to call someone in to help.
When such things happen, it adds up to considerable expense.
From a warehousing perspective, every time a product isn’t on time, variability is added, which requires safety stock. In one study, the increase in inventory carrying costs was nearly 20 percent. This led to what Vitasek calls “the hype,” the focus on the perfect order and, eventually, its benchmarking.
She cited three important early benchmark studies: one by the Warehousing Education and Research Council (WERC), another by Advanced Market Research (AMR), and the third by the Retail Compliance Council. The first two studies showed benchmarks of 84 percent and 80 percent, respectively; but the third one showed only 19 percent.
Why the huge discrepancy?
The first two studies used self-reported data, while the third one’s metrics were much tighter, analyzing data for every single shipment. “This is where jaws started to drop, where the retail industry saw they were really horrible at achieving the perfect order,” reports Vitasek.
She points to a number of reasons why measuring the perfect order was so difficult, with lack of a common definition and gaming (i.e. looking at or providing the data from a biased perspective) being the two principal culprits.
“People were defining the perfect order in several ways, and that’s why the Compliance Council’s study is better,” she notes.
That study was repeated two years later, with interesting results. “These retailers were really invested in working on the perfect order,” explains Vitasek. “In each retailer studied, the perfect order improved by more than 40 percent in just two years.”
The numbers were both discouraging and encouraging. The retailers had been at 19 percent, and while improving, only achieved 27 percent, a “sad” level according to Vitasek. But here is where she found hope: A big difference emerged between best-in-class (i.e., the top 20 percent) suppliers and average suppliers. So the math showed it was possible for suppliers to move significantly towards the perfect order. “But sharing with the suppliers so that they understand the impact of their performance is very important,” says Vitasek.
From Me to We: The Concept of Vested
At this point in her research, Vitasek moved from the perfect order to studying how to drive collaboration. “When we take away the culture of blame, break down the barriers between suppliers and buyers, and have data that can help educate, then we start to see dramatic improvements,” she says. “Without teaching people how to get the soft skills right, it’s hard for them to look at the data and profit by it.”
When this approach is taken, the perfect order isn’t “my problem versus your problem,” but rather our problem. “The Compliance Council’s answer to bad vendor performance was penalties; however, when we step back and look at the root cause—and when data isn’t used as a weapon for insight—it makes all the difference,” notes Vitasek.
She points to Nobel Prize-winning mathematician, John Nash, whose fundamental contributions to game theory have led to the development of transactional cost economics that bear out the advantages of cooperation. “Bottom line: consciously choosing to cooperate always pays off as long as you can expand the pie,” explains Vitasek. “In business, innovation drives value: 87 percent of economic value is driven from innovation.”
To innovate and expand the pie, companies need to share it. This is where the concept of vested comes in. The five rules of a vested relationship are key to moving towards the perfect order:
> Use an outcome-based versus a transaction-based business model.
> Focus on the what, not the how.
> Have clearly defined and measurable outcomes.
> Create pricing models with incentives that optimize the business.
> Follow a governance structure based on insight, not oversight.
“We have to start looking at supply chain problems through a different set of lenses,” says Vitasek. “What I like about Nulogy is how their solution simplifies the problems so we can have a fact-based discussion. The real change will come when we take the data and work with our partners in a collaborative spirit.”
Vitasek uses the metaphor of climbing Mount Everest. To reach their peak, companies have to see the difference between where they are today and where they are going. For those that have that vision—and the mindset to collaborate—no mountain is too high to conquer.
In our next post, we deep dive into metrics and measurement that keep brands and suppliers focused and accountable toward delivering the perfect order.