Key Performance Indicators

One of the most useful tools in any business is Key Performance Indicators (acronym KPI). To find the effectiveness of any process, some criteria needs to be identified to check how successful the process is. In this article we are going to have a brief look on what is key performance indicators, its benefits, how to setup and how to present it.

Key performance indicator is a business tool used to help businesses to understand to what extent their performance is acting out in reference to their strategic and financial objectives. In a widespread sense, KPI delivers the most central performance data to stakeholders to recognize if the business is on the right track or not. Furthermore, it assists to simplify the complex performance data of a business into a handy number of indicators that will help to make the right decision. The hint behind KPI is summarizing and presenting meaningful technical data using appropriate language that can be understood by ordinary stakeholders. Worthy key performance indicators are clear, obtainable, generate opportunities and initiate actions.

The importance of key performance indicators comes from the ability to show business leaders where are they compared to where they want to be. KPI can help to,

·         Assessment of the current position and how far it is from the desired one.

·         Cutting through existing oceans of data and providing simple and vital piece of information to support decision making.

·         Accurately measuring current performance and continuous learning from it to improve future results.

·         Ensuring compliance with internal and external regulations and requests.

Key performance indicators setup is a simple process, but we need to consider it first as a SMART indicator which means to be a specific, easy to be measured, easy to be achieved, real, and definite a time period. The smart KPI might be either an average of a quantitative data, i.e. average order value per month, and average production quantity per month, or a rate of qualitative data based on a selected criteria, i.e. rate of on-time deliveries, and rate of rejected purchase orders. The process itself starts with defining what is needed to be measured and find realistic, timely, and logical ways to measure it. They result needs to be compared to a preset standard which might be based on old performance or a near reality random value if KPI culture is adopted for the first time.

For more illustration, if we need to setup a KPI for measuring shipping capacity in a distribution center, the KPI used here for example is “number of trucks loaded per day”. This indicator is blind since there is several kinds of trucks which will have different time lapse to load. So we need to make sub KPIs related to the main one for every truck type to reflect the actual performance   

The presentation of the key performance indicators need to be easy to understand. The hint behind that is to choose the appropriate chart type to display, i.e. pie charts for percentages, bar charts for comparison, and line charts for trends. Also, it can just a number screen to display a single value which changes dynamically when new data is added.

Manufacturing Environments and Processes (2)

In our previous article, we have described different forms of manufacturing environment and listed its characteristics. In this article we will discuss the other part of this topic which is manufacturing processes. This will help us to have an extensive synopsis about how manufacturing firms are doing their business.

Recalling manufacturing process is the sequences of activities accomplished to transform the raw materials into final product. Every manufacturing environment has its matching manufacturing process type and layout that will help to achieve the business objective. There’s some factors that determine the manufacturing process type and layout which is linked with manufacturing environment such as customer lead time, frequency of the final product, and nature of tasks performed. 

We have 3 main manufacturing process types, i.e. project, intermittent, and flow; and each type has its corresponding process layout.

·         Project Process Type: this process type always suitable for Engineered-To-Order (ETO) manufacturing environment. Since the movement of a unique deliverable final product is too costly, all raw materials and services are moved into a fixed position layout while some other parts are assembled off site then moved back to the base production site. The project process type has a very long customer lead time and complex tasks to go through using project management techniques.

·         Intermittent process type: this process type is most suitable with Make-To-Order (MTO) and Assembled-To-Order (ATO) manufacturing environments where the final product is requiring different requirements and uneven workflow between work hubs. In this process type, general purpose resources, i.e. equipment and human, are required to be more flexible to execute different sized orders.  The intermittent process type has a medium to long customer lead time and specialized tasks to go through using functional layout,

o   Batch: a form of functional layout where there is a high production volume and all tasks need to be organized in a way that reduces motions with long production runs and less changeovers.

o   Work Center: a form of functional layout where similar tasks are grouped within production area such as cutting, sewing, knitting, and packing. This will help to have fast, flexible, and planned changeovers. 

·         Flow process type: this process type is common with Make-To-Stock (MTS) manufacturing environment where the standardized final product is requiring a specialized equipment, human, and direct and smooth flow between work cells forming a cellular layout using a repeated tasks. The flow process type has very low customer lead time because of large economies of scales and high level of inventory.

o   Line: a form of cellular layout where a discrete units of final product is produced through repetitive flow.

o   Continuous: a form of cellular layout where a specific type of final product, i.e. liquid, or solids, is produced.

Manufacturing Environments and processes (1)

Every manufacturing business has its own environment and processes that might be shared with other business and therefore classified together based on it. Manufacturing environments and processes are the core to understand how the business’s supply chain is working. In this article we are going to discuss what are the different types of manufacturing environments and processes and the various features for every type.

When planning new manufacturing business, we need to identify which manufacturing environment and process will be chosen. Every environment has its own process type and layout that fits its nature. The manufacturing environment can be defined as the outline in which different manufacturing strategies, i.e. corporate, business unit, functional, and product / process selection and design, are established and executed. The manufacturing process can be defined as the series of actions performed to transform the raw materials into final product. The manufacturing process type and layout is selected based on the selected environment, as well as use and location of inventories.

The most common manufacturing environments are,

·      Engineered-To-Order (ETO): using project manufacturing process which necessitates high customer direction over design, features, and specifications for a unique and exclusive final product. As the final product is big in size, all resources are moving to a fixed location to finalize it. This will require a very long lead time to deliver. Airbus and Boeing are known for such manufacturing environment.

·      Make-To-Order (MTO): waiting for customer’s order to start production a low to medium volume of either standard product or custom designed one using intermittent manufacturing processes, like work center and batch, which require functional layout. The lead time vary from long to medium which depends on the availability of the raw materials for the custom request. This environment can be found in various industries like fashion, food and beverages, and furniture.

·      Assemble-To-Order (ATO): keeping a stock of semi-finished products that are awaiting for simple processing through cellular process layout to reflect the customer’s needs. This will help to diminish the lead time to be medium to short. Common example for this environment is metal can processing, i.e. the manufacturer keeps high volume from the standard designed cans and after receiving the customer order, the cans is been transferred to the process line to make the final assembly which differs from customer to another.

·      Make-To-Stock (MTS): using a product based layout with continuous flow process toward nonstop availability of the final product. This will help to get the lead time to be very short as the manufacturer keeps high volume of stock in warehouses. This will lead to high inventory value on the company’s balance sheet. For example, manufacturing of juice concentrates and purees from fruits when production time is limited to fruit season.  

From the above points, we can note that manufacturing process types vary from project to continuous passing by intermittent and flow types. Every type has its own layout that can fit with. Knowing what the business is going to produce and determining the suitable manufacturing environment and processes, will help to determine possible hitches that might show up and how to deal with them. We will have manufacturing processes in more details in another article.

Forecasting

One of the critical business tool that have been growing in recent days with growth of the business intelligence through big data science is forecasting. According to a simple rule of statistical analysis is that all data are following the pattern of normal distribution, the need to analyze the old data to predict the short and mid-term future one. In this article we are going to have a brief overview on what is forecasting, the different types and what is the best method according to the data type.

Forecasting can be simply known as the process of predicting future data based on historical data. Businesses apply forecasting methodologies to decide how to distribute their budget lines for projected expenses for any forthcoming period of time. The term forecasting in supply chain usually correlated to the demand planning as a predictive analytics field.  This is typically start with what is the expected demand for the goods and services they offer; then proceeding with the quantities that should be produced to cover the market demand and offset any controllable variance in demand.

The central pointers to the forecasting process are uncertainty and risks; the uncertainty about the future and any unexpected events might incur the risk of supply chain and market sustainability like what happened in some countries during the beginning of COVID-19 epidemic when market was shorted in medical supplies, like face masks and alcohol disinfectant sprays, due to high unpredictable consumption.

The major types of forecasting techniques are

·         Qualitative forecasting which is concerned about limited scope forecasts as they are very much dependent on surveys and opinions of experts.

·         Quantitative forecasting which is concerned about quantitative data like quantities sold or dollar sales. 

The use of quantitative forecasting method is the common in the world of data. There is multiple common quantitative methodologies to perform forecasting such as moving averages, exponential smoothing, and trend projection. The selection of a method depends on several factors like the framework of the forecast, the wanted degree of accuracy, the accessibility of historical data, and the forecast’s time horizon.

The quantitative forecasting methods can be grouped into the moving averages, exponential smoothing, and trend projections. The difference between moving averages and exponential smoothing is that the moving average is giving an equal weight to all observations in the study. While in exponential smoothing, the weight is assigned in a decreasing way over time. The trend projection is used when there is obvious style in the data over a specific time period either linear or exponential.

As a demand planner, the method selection is depending on the behavior of the data. For example, for a monthly sales of a specific product, does it sold every month with high coefficient of relation to the average; then the moving average method seems to be suitable there. The same is for seasonal products, to compare current season with the previous season using the same time frame, i.e. weeks, months, or quarter. On the other hand, the data with low coefficient of relation to the average; we can use trend projection methods such as linear regression, or exponential regression methods.

Sales and Operations Planning

In order to coordinate and match demand planning with supply planning, we need to go through the process of sales and operations planning, (acronym S&OP). In this article we are going to have a look on what is sales and operations planning, its benefits and steps to execute.

Sales and operations planning is a part of supply chain planning that is considered as an integrated business management process where both business’s top management and executives are collaborating and continually focus on that every business function is going toward balancing business’s supply with market demand. This will lead to generate more detailed business plans and forecasts for the predicted sales; but also, production and capacity plans, inventory and storage plans, plans for the development of new products, and strategic and financial plans. The extensive goal is to bring daily operations into line with corporate strategy.

The sales and operations planning can benefit business by increasing transparency between business departments. Furthermore, S&OP can help improving inventory management process and enhancing the forecast accuracy for both sales and budget. Additionally, it will help to understand the product life cycle and how to manage it, and improving the overall customer satisfaction. This will help all of both managerial and operational departments to be on the same page.

The sales and operations planning process consists mainly of five steps,

·         Collecting Data: this step is concerned with gathering all historical data required for statistical forecasting including old forecasts and actual data and their variances. This will help to understand the behavior of the market during the last period to estimate the future behavior, taking into consideration internal and external factors that may affect future sales.

·         Demand planning: in this step planners are going to analyze the sales forecast resulted from the previous step, comparing it to the annual operation and business plan, and making necessary adjustments to inventory and customer services policies.

·         Supply Planning: this phase is called either production planning. It is concerned with evaluation of the production and distribution capacity and any resources limitations. This step is performed by finance, materials and production agents.

·         Pre S&OP Meeting: in this step, a reconciliation is made from all the above three steps and arrange for any necessary recommendations. The sales forecasts is compared with the demand and supply plans and ensuring that all are brought into line with both the financial targets and company’s objectives.

·         Executive S&OP Meeting: in this phase all concerned executives come across the analysis of all forecasts, plans, and recommendations from the previous step. The result will be the final approval of the S&OP to be implemented and to provide a regular basis evaluation to guarantee success.

Sales and operations planning is like any other process that need to be evaluated on regular basis to make sure of its efficiency. The metrics of S&OP is divided into two categories,

·         Demand and Supply metrics: such as demand and production forecast accuracy, inventory turnover, and capacity utilization.

·         Financial metrics: such as total sales in a period versus forecast, actual working capital versus plan, and gross margin.

Demand Planning

The start point of the supply chain planning is the demand planning. In this article we are going to discuss the definition of demand planning, its importance to business, and what are processes involved in demand planning.

Demand planning is the first phase of the supply chain planning process. We can identify the demand planning as the process of predicting market demand to make sure that it will be delivered on time and achieve customer satisfaction. Effective process should result in revenue forecasts improvements, profitability enhancements, and inventory alignment with troughs and peaks in demand. This means to have sufficient inventory to meet demand without having any surplus. There are many factors that might affect the demand such as global economic crisis events, natural disasters, and severe weather.

The importance of demand planning comes from the market environment. Since the market can change on a dime, demand plans need to be changed accordingly. If demand plans cannot be in sync quickly, that may cause several issues for a business, i.e. insufficient stocks, dissatisfied customers, inventory obsoleted in warehouses, and wasted capital investments. Demand planners should focus on market data and take it into consideration along with historical sales data.

Demand planning process consists of the following elements and steps,

·         Statistical forecasting: crucial to demand planning by the use of historical data supported forecasts to evade over or shortage stocks and guarantee customer’s satisfaction. Supply chain forecasts are made by means of advanced statistical models. Each model needs to be tested for its accuracy, assumptions, outliers, and rejections.

·         Trade promotion management: running of marketing tactics especially in retail industry that cause in-store demand such as discounts, promotions, and in-store giveaways. This help companies to be obvious from competitors by promotional activities.

·         Product portfolio management: the overseeing of the product life cycle from introduction till decline. This to understand the attachment rate of how each product is affecting other ones’ demand and select the optimum product mix that maximizes the profitability and market share.

Since demand planning process is crucial to supply chain system, it needs to be controlled and enhanced all the time. These improvements take place by using methods such as metrics, which provide gauge readings for current status. Demand planning metrics for example, and not as a limitation,

·         Forecast versus actual: this metric is concerned about comparing the actual data with the plan. It is reported on regular basis to key stakeholders to keep attention on the targets and actual performance; as well as empower proactive approach and decision making. This metric is presented as bar chart showing the actual versus the plan. This metric demonstrate to what extent the monthly forecast is accurate.

·         Pareto analysis of customers: using Pareto principle, top 20% customers make 80% of the sales. This metric is responsible for closely watching the buying actions of these top customers and report any deviations to be considered by sales team.

·         Demand variation warning indicators: this metric is accountable for finding any indicators that might lead to demand variations causing stock out or over stocking scenarios. This will help to make proactive decision to prevent side effects of demand variation.

Supply Chain Planning

The first area in supply chain operations reference model is planning. In order to have a desired output from supply chain model, we need to have an effective plan. In this article we are going to discuss what are the supply chain planning, its processes and steps, and finally the integration with controlling procedures.

Supply chain planning is the process of creating forward-looking procedures for smoothly delivery of raw materials, information, and finished products from suppliers to customers in a given period with limited resources. Simply, it is a tool to balance supply with demand to catch profitable sales opportunities at the lowest possible cost. Supply chain planning has no single process to complete, there is a collection of interrelated processes, i.e. demand planning, sales and operations planning (S&OP), materials requirements planning (MRP), master production planning, capacity planning, scheduling and distribution planning.

The first level of supply chain planning is known as strategic planning and is concerned with strategic supplier and raw materials selection and strategic sales plan and what is the purpose and goals of the business at the end. This includes considering market strategy, physical distribution structure, and the suitable production system. The second level of supply chain planning is known as master planning level that includes calculating of materials and capacity requirements for production and how will the final products be distributed till the end customers. The third level of supply chain planning is the executive level. It is concerned with issuing purchase orders for needed raw materials, and when received the production will be scheduled according to the available capacity; and then after production how to store it till transporting to customer and fulfilling their demand.

Supply chain planning goes through multiple steps starting by demand forecasting. Demand forecasting analyses the old data of business and discover patterns in demand that make it easily to predict the future demand of the market and act accordingly. Then, the demand forecast is transferred to sales and operations plan to check the feasibility and profitability of the forecasting and make any changes if necessary. After finalizing sales and operations plan (S&OP), master production schedule (MPS) for the incoming period and according to this capacity plan will be structured. The next step is to run materials requirements planning (MRP) to check the raw materials availability and if there is any need to replenish the stock according to the inventory level on the planned dates.

The supply chain planning is meaningless without supply chain controlling. The controlling process is concerned about checking if the desired result of the plan is achieved or not. Key performance indicators (KPIs) are one of controlling tools for the supply chain planning. Supply chain controlling process is providing any needed guidance for any updates or changes on the plan to be updated according to the current situation to keep achieving business’s supply chain goals.

Supply Chain Operations Reference Model

In our last article we have introduced the term supply chain, its elements, and types of lows. Also we have addressed the importance of having a supply chain model in any business. In this article, we are going to discuss a brief overview of supply chain operations reference (acronym SCOR Model).

Supply chain operations reference model can be described as a management tool defines the mandatory business processes, and how to improve them, to satisfy a customer’s demands. SCOR model was first established in 1996 by some world leading organizations and was recognized by the Supply Chain Council. SCOR model was introduced as the standard strategy, process improvement, and performance management investigative instruments for supply chain management to be adopted across the industry.

Supply chain operations reference model’s structure focuses on five areas of the supply chain: plan, source, make, deliver, and return. Along the supply chain, these areas are continuously repeating for all supply chain entities starting from the supplier’s supplier to the customer’s customer. Explaining SCOR model’s structure areas in details,

·         Plan: including supply and demand planning and balancing between organization’s limited resources and customers’ requirements. Also, selecting standards to measure the supply chain efficiency and provide ways to improve. Furthermore, aligning supply chain plan with the organization’s financial plan to achieve maximum profit.  

·         Source: including the acquisition of raw materials, goods, and services needed to meet planned and actual customer’s demand. Besides, it includes the full process of procurement, vendor management, and material management.

·         Make: including the production process of transforming raw materials into finished product to meet planned and actual customer’s demand. Moreover, it includes determination of production environment, i.e. make to stock, make to order, or engineered to order, process types, equipment and facilities

·         Deliver: including the full cycle of providing the finished products to customer as per planned demand. Additionally, this includes order management, warehousing, distribution, and transportation management.

·         Return: including the returns from customer for any reason, i.e. defective products, and returned containers and packages. Furthermore including the business rules management and regulatory requirements.

The SCOR model has recognized to assist companies to detect its supply chain problems. It is a multi-level analysis that goes into many levels of details. It explains how many times the five areas of supply chain operations reference model are continuously repeating between entities of supply chain. Every area gains its importance from being critical in the process of delivering the resources from level to level.

Supply Chain

In recent years the term supply chain has been widely used. It became an essential knowledge for any new hire regardless of his main qualification. In this article, we are going to introduce in short the definition of the supply chain, its components, and a real life example.

In 80's of the last century, supply chain was introduced in financial times’ interview with Oscar Gomes. Since then several definitions of supply chain have been ascended. Supply chain can be described as a network of people, processes, resources, and technologies in a business that work collectively to produce products and services for an end user. It is a worldwide network used to carry final products and services from raw materials to final consumers through a planned flow of information, physical distribution, and cash.

Simplest form of  supply chain consists of three main parties, i.e. supplier, manufacturer, and customer. When supply chain becomes more complex, it can consist of many suppliers, many manufacturers and many customers. Even one element can be considered as a multi performer, i.e. customer can be either an end consumer or the manufacturer who make a process on a semi finished item purchased from other supplier. Each entity adds value to the chain, hence, supply chain can be considered a value chain for any business.

There is four main flows in the supply chain,

·         Primary product flow: the downstream flow of products from supplier to customer.

·         Cash flow: the upstream flow of funds from end consumer to supplier.

·         Information flow: the upstream and downstream flow of data between entities of supply chain, i.e. sales orders, purchase orders, and invoices.

·         Reverse product flow: the upstream flow of defect products that are not accepted by end customer due to several reasons, i.e. poor quality, product not matching with specifications, or recycling.

Supply chain management is the science of planning, organizing, leading, and controlling all functions related to the supply chain such as customer services, sourcing, production, warehousing, transportation, and after sales support. All those functions are participating in the flow of goods and services from its origin till reaching the final consumer. Being unsuccessful in one function will cause other functions to fail to perform its tasks.

Every industry has its own supply chain model which every company needs to consider for surviving the competition. Not any business can survive the market without considering the importance of its own supply chain. Businesses should apprehend its supply chain model before launching new product to avoid problems that might affect their market share and their own products, i.e. lead time, safety stock and forecast accuracy. Supply chain operations reference model is a management tool defines the mandatory business processes and how to improve them to satisfy a customer’s demands. We are going to discuss it in more details in another article.

Cost Benefit Analysis

One of the most important tools for any supply chain or business folks to know is the Cost Benefit Analysis (acronym CBA). This tool will help how to reach a rational decision based on given criteria. In this article we are going to discuss the theory behind this analysis and the term of opportunity cost and how it can help to make a coherent decision.

Cost benefit analysis is a systematical methodology to find the benefits and costs of multiple potential alternatives to make an ending judgment for what is suitable for a business. The benefits are listed for every option in terms of qualifying criteria. Then these criteria are converted to a money value to measure its final cost. The option with highest benefits and lower cost will be the rational one to choose.

The application of Cost benefit analysis is confined in determining if the decision’s benefits are outweigh its cost and to provide assessment basis between expected costs and benefits. CBA is often used by companies to evaluate the attractiveness of a given strategy.

Common cost benefit analysis procedure is consisted mainly of the following steps,

·         Goals Definition: To define objectives of the analysis and the desired outcome of the comparison.

·         Alternatives Listing: Citation of available alternatives that will lead to the predefined goals.

·         Measurements selection: choosing of measurement tools that will assist in comparison of alternatives. These gears will assist in define the possible outcomes of each alternative.

·         Outcomes prediction: Identify expected benefits and costs for each one of the alternatives. Benefits and costs can be either a qualitative or quantitative.

·         Monetizing costs and benefits: after outcomes detection, it will be shown in monetary terms to make a standard base for comparison; transfer qualitative outcomes to quantitative outcomes.

·         Sensitivity analysis: this will measure the aptitude for every alternative to be changed due some factors and how this will affect its predicted benefits and costs.

·         Adoption: final selection of the best alternative that achieve the highest benefits and lowest cost.

After outlining the costs and benefits for all alternatives, Benefits Cost ratio needs to be calculated for every alternative. That is what we call cost benefit analysis formula. This ratio for a single alternative is computed as the sum of present value of future benefits divided by the sum of the future costs. The target will be choosing alternative that will give the highest ratio.

One of the factors needs to be considered in this analysis is the Opportunity Cost which can be defined as “the cost incurred from not choosing the benefits of the next best option”. In other words, it is other benefits that could have been recognized when choosing one alternative over another.

Cost benefit analysis is appropriate for short and medium size capital expenditure alternatives in short and medium time intervals. When it comes to large size of capital expenditure and long term projects, CBA might be unsuccessful to consider other financial concerns such as interest rates, inflation, and the present value of money.

Supply and Demand

Supply and demand are interrelated terms in both economic and business speech. There is no supply without demand. The demand of a specific product or service becomes an idea for a new business to start and a new way to satisfy customers. In this article, we are going to have a simple justification for supply chain and business folks about both demand and supply from two common standpoints, i.e. economic perspective and business perspective.

The Supply is a wide used term that has its own definition according to its position in the speech. If we are going to discuss the term supply in an economic speech, it can be defined as “the capability of providing product and services to the market to meet its needs”. This capability can be presented as Supply Curve.

Supply curve is an illustration of a positive relationship between price and quantity of a supplied product or service. When the quantity supplied of a specific product increases, the price will increase. The price increase is not absolute as it is affected by other factors such as the price of the substitutes, production technology or labor costs.

While in business speech, we can identify it as “A continuous flow of raw materials, final products, and services into the market according to its demand”. When demand is seasonal, the products flow is seasonal, i.e. summer season for ice cream products or Christmas season for buying gifts and gadgets.

The Demand is described as “the desire to obtain a specific product or service based on a tenacious need and to pay for its agreed market price”.  No one is going to pay for a product without necessity and proper price. This relationship between the quantities needed and the desired price can be presented as Demand Curve.

Demand curve is a diagram for a negative relationship between price and quantity of a demanded product or service. When the quantity demanded of a specific product increases, the price will decrease.

Every supply chain or business folks need to understand how to match supply with demand in any market. Since demand and supply are solid terms, the next graphic displays both demand and supply curves to identify the fair market price and the feasible quantity of products to be produced and sold to achieve the equilibrium state of the market.

The Equilibrium Point is when the quantity supplied by businesses is equal to the quantity demanded (Q*) by customers at the fair market price (P*). Above this point the quantity demanded is lower than the quantity supplied so there will be a product surplus that will affect the business through obsolete inventory. On the other side, when quantity supplied is lower than the quantity demanded, there will be a product shortage. To avoid that, the equilibrium point is managed through the price mechanism by the market through shifting the demand or supply curves and define new reasonable market price.