Measuring Collaborative Performance

The rapidly changing business processes in many corporations are both a blessing and a curse. Here's how to define a joint implementation plan with executive sponsorship and management accountability.

Companies have been measuring the performance of their operations for quite some time, but extending this measurement into the realm of collaborative, inter-enterprise operations is more challenging  it's difficult to know if the right things are being measured and what exactly should be the performance targets.

The situation becomes even more muddled when you consider that most companies have the goal of moving from the relative simplicity of connected partners to active, ongoing collaboration, which requires a business model that supports and adapts to the individual trading partners' requirements. And that goal of ongoing collaboration is complex because such partners come in a variety of sizes. For example, the same large buyers that purchase goods from billion-dollar suppliers also purchase goods from small regional suppliers. This disparity in size creates significant problems for buyers and suppliers alike: Although the trade lifecycle remains the same regardless of partner size, the methodology of communicating with each partner can vary dramatically.

All of this boils down to the fact that the metrics used to measure performance must be sufficiently flexible to take into account the diverse nature of the dynamics of the trading community. Because enterprises have a multiplicity of trading channels, trading partners must maintain multiple business rules. Pricing, inventory, delivery, seasonal promotions and the exchange/turnaround of business document associated interactions also require careful attention from the metrics perspective.

The management of inter-enterprise transactions and the flow of goods can be daunting and, if done improperly, result in serious business problems such as poor customer service, lost information, data entry errors and slower manual business processes. This risk underscores the importance of measuring the consistency of the supply chain experience across varied customer types and logistics providers. Determining what suppliers deliver products on a timely basis, in what regions of the country order errors are highest, and what companies don't comply with collaborative mandates all help reduce the complexity involved in achieving the cost-effective management of trading relationships.

The collaborative sharing of performance information can also benefit the entire trading community. But, as mentioned earlier, building a sustainable transaction flow is the key to both achieving a state of efficient flow among collaborative participants and collecting enough data to be statistically meaningful. The biggest barrier to transaction liquidity is the difficulty of getting trading partners connected and ready to exchange documents. Partner activation should not involve complex implementation requirements or technical inconsistencies. An enterprise must be able to articulate a reasonable value proposition and technology plan that cost-effectively addresses collaborative integration and automation. In addition, there must be a measurable return on investment (ROI).

The best way to provide a measurable ROI is to define a joint implementation plan with executive sponsorship and management accountability. The following is a 10-step plan that identifies and addresses the key issues that need to be discussed and agreed to by all participating trading partners:

1. Develop collaborative trading
2. Determine collaborative
3. Discuss competencies
4. Define collaboration points
5. Define performance metrics
6. Determine information sharing needs
7. Determine resource
8. Determine how to resolve
9. Determine review cycle
10. Publish agreement and rules of engagement

This plan should not be overly complex, and it should include the definition of performance measurements. Performance metrics and the ability to measure the success of the collaborative effort is key to the ongoing project. Although the metrics (such as forecast accuracy, delivery performance and cycle times) will differ by organization and trading partner, the important issue is that the data be available for analysis.

Counting on Metrics

Metrics are valuable to all sides of the trading equation and can be used as both a carrot and a stick. Offering partners a controlled view into the trading relationship is a powerful inducement because of the cost and customer relationship implications. Predictive performance models, such as those available in packaged analytic applications, allow the published metrics to help anticipate and plan for the future. The same metrics can also be used to validate critical issues and their potentially negative impact on the relationship.

Additionally, the metrics that a company establishes must be appropriate and realistic to the process and collaborative participants. Customer service, procurement, logistics and distribution must each be measured independently; using generic metrics (sales are up or down, for example) to measure the performance of a specific operational discipline is ineffective.

However, the art and science of choosing performance goals is tricky because it involves the often-conflicting nature of departmental goals. For example, procurement may be measured on a cost-per-unit basis with suppliers. While this drives down costs, it also negatively affects warehousing operations with excess inventories. Logistics departments may have been given incentives to work with transportation partners to ship on a full truckload basis. Even though this approach results in logistics efficiencies, it is at the expense of on-time deliveries. These issues don't minimize the value of collaborative performance measurement, but they do point out the complexities that are often involved.

As companies become more integrated and externally focused, metrics can help drive strategic change across the trading community. Electronically connecting with partners allows firms to operate more closely. This "virtual enterprise" represents a supply chain that is highly integrated and acts more like a single organism. In this case, measurements can help answer the following questions:

" Is the collaborative relationship beneficial for your enterprise and your trading partner's enterprise?

" Are costs being reduced from the operations, overhead or material perspectives?

" Are collaborative partners more responsive than traditional partners are?

" Has customer service improved?

" Have errors decreased?

At the end of the day, financial performance will dictate the success or failure of collaborative initiatives. Data collection, analysis and the comparison to defined performance metrics will determine how or even if a company should proceed. Partner automation and integration provides the visibility to understand the actual effect on an enterprise.

As discussed earlier, it is possible to measure a variety of supply chain performance indicators, assuming that you are collecting the appropriate data for analysis. Also keep in mind that to ensure enterprise and departmental goals are being met equally measurements should be included that take both into account. This includes, for example:

" Delivery performance: requested vs. actual dates at the line-item level

" Cash-to-cash cycle time: the time it takes to close the loop between funds utilization (material acquisition) and collection (invoice payment)

" Pay on receipt: the time that is required to match and reconcile invoices

" Material availability: the number of days that are required to achieve a sustainable increase in production

" Total supply chain costs: the total cost, as a percent of sales, to manage order processing, acquire materials, manage inventory, and manage supply chain finance, planning and MIS costs

" Order accuracy: products delivered vs. what was ordered

" Replenishment: the time it takes to replenish inventory and the accuracy of the replenishments

" Demand management: stock keeping units ordered vs. what was forecast

" Customer service level/fill rate: items available in stock for delivery per purchase order.

The preceding metrics represent different aspects of the supply chain. When viewed holistically, costs can be reduced significantly if trading partners work together to identify areas of improvement and increase efficiencies. The key is to automate, integrate, and then monitor trading partner processes and the associated exchange of trade documents and data.

The Bottom Line

An effectively managed collaborative supply chain can save a $600 million company as much as $42 million annually. For example, companies operating within collaboration function with as much as 60 percent fewer inventory days than nonaligned competitors  and lower inventory means more working capital. Collaboration can also produce reduced lead times and decreased cycle times, leading to an advantage in "cash-to-cash" cycle time.

Knowing how to work with and measure the effectiveness of trading partners also helps your company use the best suppliers and logistics partners on a go-forward basis. Quality, delivery performance, costs and service can be evaluated, resulting in a reduction of partners and associated material acquisition costs. Changes in customer demand can be met with less disruption. Finally, you can use performance analytics to measure and help iterate plans. In particular, this approach allows companies to become even smarter about how they interact and where further efficiencies can be derived. The end result is reduced inventory costs, better customer service, and improved cycle time and fill rates.

An example of this is in the telecommunications industry. A large enterprise had many small suppliers that required the use of fax and related manual processes to conduct business. Internal audits discovered that the full burdened cost for each purchase order (PO) was $31.00. Related transactions required to complete the order process and receive the goods were equally expensive. In total, these manual processes represented 75,000 transactions annually at a cost of $3.6 million. Since the firm was already using electronic data interchange (EDI) to conduct business with its larger suppliers it decided to utilize a Web-based EDI solution for the small/medium enterprise (SME) segment of its trading partner base. Faxes were completely replaced by Web forms so suppliers could transact business over the Internet. Once completed, the forms were translated into the appropriate EDI document and sent to the telecom company. After one year the cost of processing these 75,000 transactions was reduced to $1.1 million  a savings of over $2.5 million. In addition, error rates were dramatically reduced, and the existing IT investment was fully utilized and leveraged for this segment of the business.

All these benefits are quantifiable, but only companies that have jointly defined processes and goals, including the collection of data necessary to measure those processes, can achieve them. Performance metrics do not, in and of themselves, result in savings; they point to specific initiatives that are successful or need tuning. A feedback monitoring mechanism is required to ensure all parties are alerted when refinements are indicated. In this case, an event-based solution is best because it can be automated across the trading community, minimizing the amount of information that needs be reviewed. Ultimately, a performance dashboard should be implemented that allows management to quickly, and graphically, review key metrics.

Collaborative performance metrics should be used to evaluate both the progress in implementing as well as the final results of inter-enterprise initiatives. Performance review must occur routinely by both general and departmental management. While overall strategic goals of the business are owned by senior management, the actions of individual departments are what make collaborative relationships work.

A balanced set of focused metrics, as well as the sharing of operational, planning and performance information, are the keys to successfully collaborating with trading partners. These new business strategies need to be consistently monitored and measured. It is also a good idea to implement collaborative programs in a phased manner. Select trading partners that have a stake in the success of the program, and be sure to include everyone when determining what metrics to analyze and how to measure success.

Business activities are extending beyond the boundaries of the enterprise. Technology innovation, the Internet and an awareness of the potential benefits are the primary factors driving this dynamic forward. Changing business processes offers both opportunities and pitfalls; in order to communicate results and maximize success, performance measurement and feedback must be an integral part of any collaborative initiative.

Steve Rabin
currently serves as the chief technology officer at EB2B Commerce Inc. He has designed and developed a wide range of supply chain management and B2Bi solutions, including the world's first production-based, Web-enabled worldwide supply chain planning system.

Niel Powers
is the director of product marketing at The Progress Co. He has 20 years of experience in the technology and applications market, including over 10 years of experience in developing, marketing and selling progress-based applications.