SUPPLY CHAIN DEFINITIONS AND KEY MEASURES

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1 SUPPLY CHAIN DEFINITIONS AND KEY MEASURES Version THE FRAMEWORK FOR PROCESS IMPROVEMENT Experience shows that benchmarking s potential to drive dramatic improvement lies squarely in making out-of-the-box comparisons and searching for insights not typically found within intra-industry paradigms. To enable this type of benefi cial benchmarking, the APQC Process Classifi cation Framework SM (PCF) serves as a highlevel, industry-neutral enterprise model that allows organizations to see their activities from a cross-industry process viewpoint. The PCF enables organizations to understand their inner workings from a horizontal process perspective, rather than a vertical functional viewpoint. The PCF does not list all processes within a specifi c organization, and every process listed in the framework is not present in every organization. 1.0 Develop Vision and Strategy 4.0 Deliver Products and Services OPERATING PROCESSES S >>> 2.0 Develop and Manage Products and Services >>> 3.0 Market and Sell Products and Services >>> 4.0 Deliver Products and Services >>> MANAGEMENT AND SUPPORT SERVICES 5.0 Manage Customer Service Originally created in 1992 by APQC and a group of members, the framework has experienced more than twenty years of creative use by thousands of organizations worldwide. The PCF is supported by APQC s Open Standards Benchmarking research. It is continuously enhanced as APQC s Open Standards Benchmarking team further develops defi nitions, processes, and measures. Please visit APQC s web site periodically for updates. The PCF is available for organizations of all industries and sizes at no charge by visiting Develop and Manage Human Capital 7.0 Manage Information Technology 8.0 Manage Financial Resources 9.0 Acquire, Construct, and Manage Assets 10.0 Manage Enterprise Risk, Compliance, and Resiliency 11.0 Manage External Relationships HISTORY The Process Classifi cation Framework was originally envisioned as a taxonomy of business processes. The initial design involved more than 80 organizations from the United States and worldwide. Since its inception, the PCF has been updated several times to refl ect changes in the way organizations do business Develop and Manage Business Capabilities In response to feedback from users of the PCF, APQC regularly engages practitioners, consultants, and academics to develop defi nitions based on real-world experience with the processes. That collaborative effort resulted in this document: a listing of processes with defi nitions and selected key performance indicators from APQC s Open Standards Benchmarking repository. The defi nitions contained in this document are to be considered in conjunction with the PCF. The content in this document will be updated according to research performed by APQC and subsequent updates to the PCF. This document was created using PCF version Version October 2012

2 4.0 Deliver Products and Services Defi nitions and Key Measures TABLE OF CONTENTS 4.1 Plan for and align supply chain resources 3 Key Performance Indicators Develop production and materials strategies Manage demand for products and services Create materials plan Create and manage master production schedule Plan distribution requirements Establish distribution planning constraints Review distribution planning policies Assess distribution planning performance Develop quality standards and procedures Procure materials and services 5 Key Performance Indicators Develop sourcing strategies 5 Key Performance Indicators Select suppliers and develop/ maintain contracts 5 Key Performance Indicators Order materials and services 6 Key Performance Indicators Manage suppliers 6 Key Performance Indicators Perform quality testing Maintain production records and manage lot traceability Deliver service to customer Confirm specific service requirements for individual customer Identify and schedule resources to meet service requirements Provide service to specific customers Ensure quality of service Manage logistics and warehousing 8 Key Performance Indicators Define logistics strategy 8 Key Performance Indicators Plan and manage inbound material flow 8 Key Performance Indicators Operate warehousing 9 Key Performance Indicators Operate outbound transportation 9 Key Performance Indicators Manage returns; manage reverse logistics 9 Key Performance Indicators Produce/Manufacture/Deliver product 6 Key Performance Indicators Schedule production Produce product 7 RIGHTS AND PERMISSIONS 2012 APQC. ALL RIGHTS RESERVED. APQC encourages the wide distribution, discussion, and use of the PCF and PCF defi nition documents for classifying and defi ning processes. APQC grants permission for use and adaptation of the PCF for internal use. For external use, APQC grants permission for publication, distribution, and use, provided that proper copyright acknowledgment is made to APQC. No modifi cations to the look or content should be made in external venues. Please use the following text when reusing the PCF in external print or electronic content. The PCF was developed by APQC and member companies as an open standard to facilitate improvement through process management and benchmarking regardless of industry, size, or geography. The PCF organizes operating and management processes into a number of enterpriselevel categories, including categories, process groups, and over 1,000 processes and associated activities. The PCF and its associated measures and benchmarking surveys are available for download and completion at no charge at ABOUT APQC APQC is a member-based nonprofi t and one of the world s leading proponents of knowledge management, benchmarking, and best practices business research. Working with more than 750 organizations worldwide in all industries, APQC provides organizations with the information they need to work smarter, faster, and with confi dence. Visit or call and learn how to Make Best Practices Your Practices SM. 2 Permission granted to photocopy for personal use APQC. ALL RIGHTS RESERVED.

3 4.1 Plan for and align supply chain resources (10215) This category includes all processes that are involved in planning, including managing the demand for products and services, creating a materials plan, and scheduling production to meet actual demand. Sales and operations planning activities are included in this process group. Key sales and operations planning activities result in the development of the sales and production plan. The processes in this group may be performed regularly (i.e., at the beginning of each period). Cash-to-cash cycle time in days Demand/supply planning costs per $1,000 revenue Number of FTEs for the supply chain planning function per $1 billion revenue Supply chain management costs per $1,000 revenue Develop production and materials strategies (10221) The Develop production and materials strategies process involves identifying activities to outline materials use and production. This process includes the definition of manufacturing goals, labor and materials policies, outsourcing policies, and manufacturing capital expense policies. This process also involves identifying production capacities and network and supply constraints. Production processes are created and production workplace layouts and infrastructures are solidified Manage demand for products and services (10222) Manage demand for products and services is the process that defines the activities used to manage demand for products and services, including forecast measurements (such as baseline and consensus), collaboration with customers, and allocating available-to-promise inventory. Various types of demand are considered in this process, including firm demand, opportunity demand, and forecasted demand; these comprise the overall demand plan. The evaluation and revision of the forecasting approach also occurs during this process. Note that demand management can take on a different aspect through the use of promotions and pricing when demand must be constrained due to limited availability, or when there is a goal to motivate purchases of certain products or services. An important measure for this process is forecast accuracy percentage Create materials plan (10223) The Create materials plan process includes activities used to source and obtain materials needed to execute operations to meet customer demand. In products-related businesses, materials plans consider hard goods, while in services-oriented businesses, materials plans consider management of service delivery resources. This process begins with generating an unconstrained plan. Additional steps include collaborating with suppliers or contract manufacturers, identifying critical materials and supplier constraints, monitoring material specifications, generating a constrained plan, and defining production balance and control. Demand may be geographic, regional, and global, and the material plan must take into account the most practical means to satisfy the demand using identified resources. Version October

4 ( 4.1 Plan for and align supply chain resources continued ) Create and manage master production schedule (10224) The process Create and manage master production schedule begins with the generation of a site-level plan. It includes managing work-in-process inventory, collaborating with suppliers, and generating and executing a site schedule. The goal of scheduling production is to minimize production costs while maintaining the desired level of inventory, cycle times, quality, and service. Some services-related businesses focus on maximization of service delivery resource utilization rather than minimized production costs. Inventory, setup and changeover, and transportation and ordering costs must be understood across the business. The impacts associated with any outsourced production and distribution operations must be considered during the scheduling process, and supply chain partners must be committed to production schedules Plan distribution requirements (10225) Plan distribution requirements involves the allocation of available-to-promise inventory and the maintenance of master data. This process also includes the determination of finished goods inventory requirements at the destination, the calculation of consolidation at the source, the calculation of a destination dispatch plan, and the calculation of destination load plans. During this process organizations manage the various aspects of distribution, including collaborative replenishment planning, requirements for partners, dispatch plan attainment, partner load plans, cost of supply, and capacity utilization Establish distribution planning constraints (10226) Establish distribution planning constraints encompasses activities that define possible impediments to distribution. This includes determining distribution center layout constraints, inventory management constraints, and transportation management constraints Review distribution planning policies (10227) Review distribution planning policies is comprised of activities that take a close look at distribution to determine if any changes are necessary. It includes the review of the distribution network, the establishment of sourcing relationships, and the establishment of dynamic deployment policies Assess distribution planning performance (10228) Assess distribution planning performance includes activities that establish performance measurements, analyze performance, and report and act upon findings. This process includes the establishment of appropriate performance indicators and monitoring frequency. It also includes the calculation of performance measures, the identification of performance trends, and the analysis of performance benchmark gaps. Activities reports can then be compiled and a performance improvement plan can be generated Develop quality standards and procedures (10368) Develop quality standards and procedures involves activities that address product or service quality. It includes the establishment of quality targets, the development of standard testing procedures, and the communication of quality specifications. 4 Permission granted to photocopy for personal use APQC. ALL RIGHTS RESERVED.

5 4.2 Procure materials and services (10216) The group of processes used to Procure materials and services includes the business activities of procurement planning, purchasing, and sourcing. This process can be further broken down into sourcing strategies, selecting suppliers and developing contracts, ordering materials and services, and appraising and developing suppliers. Procurement includes both direct and general items, for example, production parts and products (OEM); repair parts; maintenance, repair, and operating (MRO) supplies; and services (administrative and technical). Procurement may also include subcontracted labor resources. Commodity management also falls under this umbrella. Number of purchase orders processed per procurement process group FTE Number of FTEs for the procurement process group per $1 billion purchases Total cost to perform the procurement process group per $1,000 purchases Develop sourcing strategies (10277) Develop sourcing strategies, also known as supplier portfolio strategies, comprises multiple activities that include clarifying purchasing requirements, developing a procurement plan, analyzing a company s spend profile to identify high-opportunity categories, matching needs to supply capabilities, developing an inventory strategy, seeking opportunities to improve effi ciency and value, and collaborating with suppliers to identify sourcing strategies. The process may include the development of a timeline that incorporates sourcing milestones for each category of sourced product or service. Sourcing strategies are occasionally identified by category or supplier; these may include reverse auction, request for information (RFI), request for proposal (RFP), request for quote (RFQ), or consortium. For services-related businesses, the sourcing strategy will include sources of supply other than those that are procured. This may include, for example, in-house, low-cost labor from other geographies, low-cost labor from alternate employee categories (e.g., retirees that re-enter the company with a modified employment type), use of affiliates, or a joint venture. All of these elements are used to create a procurement strategy and plan that guides purchasing activities with a focus on reducing total cost of supply and creating a balanced supplier portfolio. Number of FTEs that perform the process Develop sourcing strategies per $1 billion purchases Total cost to perform the process Develop sourcing strategies per $1,000 purchases Select suppliers and develop/maintain contracts (10278) The process Select suppliers and develop/maintain contracts involves selecting suppliers (typically through a request for information [RFI], request for proposal [RFP], or request for quote [RFQ] process) to create business value, reduce cost, and ensure quality. The process also includes certifying and validating suppliers, as well as negotiating and managing contracts. Number of FTEs that perform the process Select suppliers and develop/maintain contracts per $1 billion purchases Total cost to perform the process Select suppliers and develop/maintain contracts per $1,000 purchases Version October

6 ( 4.2 Procure materials and services continued ) Order materials and services (10279) Order materials and services is the process of planning, ordering, and executing the physical delivery of materials and services from suppliers to the points of need and use. This process comprises multiple activities, including processing and reviewing requisitions, approving requisitions, soliciting and tracking vendor quotes, creating and distributing purchase orders, expediting orders to satisfy special requests, recording receipt of goods, and researching and resolving exceptions. Cycle time to place a purchase order in hours Number of FTEs that perform the process Order materials and services per $1 billion purchases Number of purchase order line items processed per Order materials and services FTE Total cost to perform the process Order materials and services per $1,000 purchases Manage suppliers (10280) Manage suppliers is the process of developing and managing programs and policies for interacting with suppliers, measuring supplier performance, and improving supplier performance. This includes monitoring and managing supplier information, preparing and analyzing supplier performance (including meeting quality standards), supporting inventory and production processes, and monitoring the quality of the delivered product. Number of FTEs that perform the process Manage suppliers per $1 billion purchases Total cost to perform the process Manage suppliers per $1,000 purchases 4.3 Produce/Manufacture/Deliver product (10217) The process group Produce/Manufacture/Deliver product comprises four main high-level processes: scheduling production, producing the product, performing quality testing, and maintaining production records to manage lot traceability. Manufacturing is the physical production of finished goods. Total cost to manufacture per $1,000 revenue Unplanned machine downtime as a percent of scheduled run time Schedule production (10303) This process includes six activities: generating a line level plan, generating a detailed schedule, scheduling production orders and creating lots, scheduling preventive maintenance, scheduling requested (unplanned) maintenance, and releasing product orders and creating lots. The detailed schedule includes the exact quantities of each product to be produced on a given day or week, as well as the machines the products will be run on, setup times, etc. 6 Permission granted to photocopy for personal use APQC. ALL RIGHTS RESERVED.

7 ( 4.3 Produce/Manufacture/Deliver product continued ) Produce product (10304) Through the production process, it is most efficient to execute the detailed schedule that was created during the Schedule production step. The Produce product process will vary depending on the product produced, level of automation, labor force skill, and manufacturing strategy. Product production also involves managing raw material inventory, reporting any maintenance issues, rerunning any defective items, and assessing production performance. Manufacturing cycle time in hours Actual production rate as a percentage of maximum capable production rate Finished-product fi rst-pass quality yield for primary products Perform quality testing (10369) This process consists of activities associated with the maintenance of capital equipment and supply chain processes. These activities include calibrating of testing equipment, testing of capital equipment using a standard testing procedure, and recording test results Maintain production records and manage lot traceability (10370) Maintain production records and manage lot traceability encompasses activities to track items created during the Schedule production and Produce product processes. These activities include determining a lot numbering system and determining lot use. 4.4 Deliver product service to customer (10218) This process group includes processes that are involved in delivering quality services to customers. These processes include confirming the specific service requirements, identifying and scheduling resources to meet service delivery requirements, providing the specific service, and ensuring that the quality of the service is acceptable to the customer Confi rm specifi c service requirements for individual customer (10320) This process includes creating a customer profile record, processing individual customer requests, and generating service orders. This may involve systems like customer segmentation, customer relationship management (CRM), order management, etc Identify and schedule resources to meet service requirements (10321) The Identify and schedule resources to meet service requirements process requires creating a resource plan and schedule, creating an order fulfillment schedule, and developing a service order. Resources could include personnel, time frames, and/or fi nances. Version October

8 ( 4.3 Deliver product service to customer continued ) Provide the service to specifi c customers (10322) This process involves organizing the daily product service order fulfillment schedule, dispatching resources, managing order fulfillment progress, and validating the order fulfillment block completion Ensure quality of service (10323) To Ensure quality of service, a company can identify completed product service orders to use for feedback, identify incomplete orders and service failures, solicit customer feedback on the services delivered, and process the customer feedback. 4.5 Manage logistics and warehousing (10219) Manage logistics and warehousing is the process that plans, implements, and controls the forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers requirements. This includes defining a logistics strategy and managing inbound transportation, warehousing, and outbound transportation. Number of FTEs that perform the logistics process group Manage logistics and warehousing excluding Manage returns; manage reverse logistics per $1 billion revenue Total cost to perform the logistics process group Manage logistics and warehousing excluding Manage returns; manage reverse logistics per $1,000 revenue Defi ne logistics strategy (10338) Defining logistics strategy refers to translating customer service requirements into logistics requirements; designing the logistics network required to meet these requirements, including components such as warehouse and distribution center (DC) assets, transportation assets, technology infrastructure, and inventory deployment; communicating outsourcing needs; developing and maintaining delivery service policy; optimizing transportation schedules; and defining key performance measures such as logistics costs, inbound delivery performance, space utilization, asset utilization, and outbound carrier delivery performance. Number of FTEs that perform the process Define logistics strategy per $1 billion revenue Total cost to perform the process Define logistics strategy per $1,000 revenue Plan inbound material fl ow (10339) This is the process of planning inbound material receipts, managing inbound material flow, monitoring inbound transportation carrier performance, and managing the flow of returned materials. Number of FTEs that perform the process Plan inbound material flow per $1 billion revenue Total cost to perform the process Plan inbound material flo w per $1,000 revenue 8 Permission granted to photocopy for personal use APQC. ALL RIGHTS RESERVED.

9 ( 4.5 Manage transportation and warehousing continued ) Operate warehousing (10340) Operate warehousing is the process of receiving, inspecting, and storing incoming materials; tracking product availability; picking, packing, and shipping product for outbound delivery; and tracking inventory deployment. Warehousing supports inbound and outbound transportation services. This process also involves tracking inventory accuracy, tracking third-party logistics storage and shipping performance, and managing physical finished goods inventory. Inventory carrying cost as a percentage of average inventory value Number of FTEs that perform the process Operate warehousing per $1 billion revenue Pick-to-ship cycle time in hours Total cost to perform the process Operate warehousing per $1,000 revenue Operate outbound transportation (10341) Operate outbound transportation is the process of preparing goods for delivery from a warehouse to a receiving location. It typically comprises activities such as planning, transporting, and delivering outbound product; tracking of carrier delivery performance; managing the transportation fleet; and processing and auditing of carrier invoices and documents. Number of FTEs that perform the process Operate outbound transportation per $1 billion revenue Total cost to perform the process Operate outbound transportation per $1,000 revenue Manage returns; manage reverse logistics (10342) Returns processing is the handling, processing, and disposition of the product and packaging returned by the buyer to the seller or an intermediary. Returns management includes authorizing and processing of returns, performing reverse logistics, performing salvage activities, managing and processing of warranty claims, and repairing or refurbishing and returning products to customers or to stock. Number of FTEs that perform the process Manage returns; manage reverse logistics per $1 billion revenue Return processing cycle time in days Total cost to perform the process Manage returns; manage reverse logistics per $1,000 revenue 123 North Post Oak Lane, Third Floor Houston, Texas phone fax pcf_feedback@apqc.org Version October