Using metrics to optimize your supply chain
William Atkinson -- Purchasing, 7/15/2004 2:00:00 AM
When M. Scott Rizzo, director of supply management at a pharmaceutical firm Hoffman-LaRoche in Nutley, N.J., was given responsibility for transportation, warehousing and distribution in early 2002, he wanted to find a way to look at it strategically—to turn activities in this area into a competitive advantage. Instead of overly complicating the issue, Rizzo concluded that when it came to transportation, distribution and warehousing, there are really two primary activities: shipping products and receiving products.
"Everything else supports these two activities," Rizzo says, adding that the eventual goal is to drive greater preparedness for unforeseen activities and ensure uninterrupted product flow.
To become more strategic, Rizzo and his team developed several metrics and initiatives that support the company's overall goals for receipt and delivery of products. The three primary metrics developed were line item fill rate, back orders, and throughput. Two metrics in the warehousing area that support the three primary ones are: failure to receive and failure to ship.
The team created a project plan that said: Here is where the company is, and here is where it wants to be with its metrics and its total risk mitigation piece. To ensure success, Rizzo addressed two problems that can be inherent in such projects
First, in setting metrics, there is always some "creep" which can distort the goals of a project. For example, an initial set of metrics may have a goal of reducing risk by 20%, but 25% soon seems more attainable. "As a result, we installed a metric to measure our measurements — a measure on how well we are sticking to the plan," he says.
Secondly, the team at Hoffman-LaRoche created a culture of teamwork and communication. "I know that sounds clichéd, but it really has been critical to our success," Rizzo emphasizes. "When you launch a project like this, you identify selected individuals who are experts in their specific areas. However, as they work on their individual portions of the project, they tend to gravitate to what they know best, even though this may not be what the original intent of the milestone is."
To guard against this, Rizzo emphasized that the overall goal was greater than the individual pieces of that goal. "For example, a person who was an expert in planning needed to realize that planning in and of itself wasn't as important as the end result of having a document that could tell you what your warehouse cool room capacity is going to be in 2008," he notes. Over time, as people began to understand the goals, they began to focus more and more attention not on doing what they did well, but rather on making sure that what they did would move things forward to achieve the ultimate goal.
"We are in the process of reviewing our entire warehouse structure right now," Rizzo says. That review includes looking at some optimization processes to balance the company's three warehouses and finding ways to reduce risk by redistributing inventory so an adverse event at one warehouse doesn't shut down the company's supply chain.
"We are also trying to determine whether our distribution center makes sense where it is currently located," he adds.
To date, Hoffman-LaRoche has already saved some money, but financial savings are not the most important result, according to Rizzo. "More important is the fact that, by having metrics in place, we can determine what our needs will be at certain points in time," he says. "For example, will we need this specific warehouse in five years?"
By observing all of the people involved in this process, Rizzo has been able to identify individuals who are leaders—people who gravitated to a process like this and began to thrive. Interestingly, he began to see this in some people who, at first, he would not have picked as leaders. Conversely, he has seen some people who he initially assumed would be leaders actually end up becoming followers. Some of this became evident when it came time for the participants to commit to achieving a certain milestone by a certain date.
"With some people, you could see the pushback," he recalls. "On the other hand, you could also see the people who stood up and said they were willing to take on that challenge. And identification of the real leaders has helped to strengthen the overall department."
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