*

Designing Key Performance Indicators for Strategic Sourcing

Dr. Reddys Labs, Hyderabad

Intern: Sumeet Shekhar Neeraj

G I TA M S c h o o l o f I n t e r n a t i o n a l B u s i n e s s
Under the Supervision Of Industry Guide: Mr. Nihar Medh
Director- Supply Chain Management Dr. Reddys Laboratories, Bachupally, FTO-II Hyderabad, India.

University Guides: Dr. Ch. Venkataiah & Dr. R.Venkateswarlu

Asst. Director, Professor- Statistics & Operations Research

Introduction & Profile

Industry Profile
Highlights (Exports, Domestic) Growth Drivers Concerns

Company Profile
Segments & Areas of Operation Vision Financials

SCM Excellence at Dr. Reddys Labs. India

Sections & Sub Sections SAP- ERP, Symphony (Inherent Simplicity) Web ERP Interfaces (VMI) Strategic Sourcing
2

Need for the Study

No existing system
Quick diagnosis of variation alerts Indicators of functional health

Real-time reference
Achievements of strategic & financial goals Vendors not well cooperating & high vendor attrition since past 5 years (60 RM Vendors)

Objective of the Study

Designing KPIs for Strategic Sourcing functions

To help monitor and control their Sourcing processes & operations

To define what & when to monitor & review

To study a few metrics from the defined KPIs

Methodology of the Study

Start meeting the teams & understand the firms dynamics & metrics (Delphi methodology)

Select the most suggested metrics & weightages indicating the performances of various roles across the team & design a KPI model

Define the weightages and get the same approved by the respondents & team heads

Report the findings & conclude

Study & Interpret /statistically test the model selected

Pilot test the KPIs based on available data/ survey results

Data Analysis & Interpretation

KPI designing results & KPIs Pilot Study
KPI review structure:
Outcome of Survey-1: Key Metrics Survey (Unstructured) KPI framework designed with assigned assessment weightages

Pilot study of KPIs selected:

Financial data study Survey-2: Suppliers Satisfaction Survey (Structured) Survey-3: Employees Internal Survey (Structured)
6

Survey-1: Key Metrics Survey

Sample: (Employees participated)
Director (1), Associate Director (6), Managers (08), Deputy Managers (10), Jr. Managers (06), Sr. Executives (02) and various others beyond the team..

Questions mainly asked about:

Strategic basis* Existing system performance review process Views on financial & non-financial metrics & targets What metrics are of high importance & can be used Frequency & weightage for the metrics review Source of the suggested metrics data

KPI framework designed with assigned assessment weightage based on the survey results
7

Defined Review Levels (1-4)

Levels of review defined as under
Level 1: Buyer
Reviewer : Lead Buyer Review : Regularly/as and when required. Agenda : Regular issues, cross functional matters Daily self review before day end.

Level 2: Lead Buyer

- Reviewer : Category Head - Review : 2 days (alongwith other team reps if needed) - Agenda : Regular review of the functioning of subordinates and health of the team functioning on daily basis - Supplier related issues - Supplier relation review (once in a month)
8

Defined Review Levels (1-4)

Level 3: Category Heads
Reviewer : Sourcing Head Review : Monthly Agenda : Review of KPI Compliances, deviations etc. Review of the training needs and rewarding decisions

Level 4: Sourcing Head

- Reviewer : SCM Head - Review : Monthly - Agenda : Last months KPI review and next month planning - Cross functional meetings, MRMs, Financial targets, Audits & other issues

Level-4 Reviewer
Sr. No.
1

: Sourcing Head : SCM Head

Metrics/Indicator
Financial targets, budget deviations review, root cause analysis Viz. Inventory turnover, ROCE, Cash to cash cycle, 3PL costs etc. Planning & strategizing the sourcing and procurement activities for APIs, Excipients, Packaging material, MRO & Capital purchases for the FTO & loan licensing locations. Implementing best in class practices, technologies & robust processes within various categories. Timely availability of quality material at the right cost to ensure smooth product supply for product launches and routine production. Planning & facilitating cost improvement programs (development of existing & alternate vendors) to help competitive product pricing.

Typology
Financial

Measure
Individual targets review and alignment with the firms strategy Improvement on key matrices: % Reds & Blacks; Reduced replenishment time & Throughput Improvement Measure financial & business impact of tech/process improvements done Portal reports (Availability & Lead time), product launch dates & Purchase Savings as reported by BU Finance Monthly financial metrics & cost improvements studied

Weight
10%

20%

Strategic

Standards

10% 20%

Strategic

10%

Financial

6 7 8

Sustainability Strategic Compliance

Driving the implementation of organizational initiatives within internal team as well as the external suppliers.
Building a robust supplier base capable of meeting the qualitative as well as quantitative business outcomes of the organization. Ensure compliance with cGMP regulations, ISO, SOX, FDA & ICH guidelines.

SCRM reviews, internal employees satisfaction level

Financial & qualitative measures reported by finance & quality teams Audit success rates

10%
10%

10%

11

Inventory Sold PR to PO time PO raised

(After Processing)

Inventory Purchased (Recd.) Inventory Period A/c Receivable Period

Cash Received

Time

A/c Payable Period

Cash Paid for Inventory Operating Cycle Cash Cycle

The operating cycle is the time period from inventory purchase until the receipt of cash. The cash cycle is the time period from when cash is paid out, to when cash is received.

12

Level-3 Reviewer
Sr. No.
1

: Category Head : Sourcing Head

Metrics/Indicator
Improvement in "Business Partner Relationship Index (BPRI)" for the category handled as a part of the mission: "Together Further"- New products and existing critical products. Build a robust team capable of delivering the expected performance sustainably. Alternate source development through a cross-functional team and continuously monitor the progress and address operational bottlenecks, & developing the existing vendors to meet the quality and supply requirements of the organization. Improvement of the replenishment time as much as possible, ensuring availability of materials in a seamless manner, reduce PRPO time and negotiate to optimum vendor lead times helping meet the delivery programs. Ensure unbiased vendor treatment and ethical practices and procurement codes and delegation of authority codes as specified. Ensure buffer management based on the seasonality and demand conditions and other management plans. Ensure teams training needs are fulfilled.

Typology
Resilience

Measure
No. of projects achieved on time, number of cases (batches) with delayed flags Attrition rates, firms financial indicators, individual employees metrics Monthly review of unresolved issues and vendor development programs planning and progress review

Weight
20%

20%

Strategic

10%

Strategic

Strategic

Portal reports, lead time & delayed status study every month

20%

Financial

Approval reports & monthly purchase reports Portal reports Employee internal surveys, employees performance assessment reports, targets achievements details

10%

Resilience

10% 10%

Strategic

13

Level-2 Reviewer

: Lead Buyers : Category Heads

Sr. No.
1

Typology
Resilience

Metrics/Indicator
Product tracking and expediting deliveries, negotiations with suppliers for best lead time offers
PRPO conversion time reduction for better throughput and turnarounds Daily review of the inventory levels and shortages, pending PRs to be converted to PO and POs for approval Discuss rejections and other anomalies occurring with the category heads and suppliers for quality improvements Process/execute efficient commercial comparisons of quotes and choice of best offers across quotations In terms of urgency, prove to find a viable alternative and meet target dates of projects by working closely with alternate vendors if needed Cost reduction negotiations Functional audit compliances CHA SLAs and delays at port/airports, incoterms study

Measure
Traceability of goods at any point of time
Monthly planned production batches and achievements/ or those with delayed flags Less than 1% blacks / Less than 5 % Reds as per symphony system Rejection rates (QA report)

Weight
10%
10%

Strategic

3 4

Strategic Strategic

20% 10%

5
6

Financial
Resilience, Strategic Financial Strategic Financial

RFQs and quote comparisons Projects/tasks completion times, vendor relationship index study PO values per unit across time Audit reports & occurrences of issues Demurrages paid (monthly)

20% 10%

7 8 9

5% 10% 5%

14

Level-1 Reviewer
Sr. No.
1 2

: Buyers : Lead Buyers

Metrics/Indicator
RRT, TAT, TPT, PRPO time reduction Daily review of Symphony, RFQs, Availability of materials on time to internal customers Release follow-ups and quality documentation issues handling like Deviations, documentation requirements, change controls, audit reports filing etc. Discuss rejections and other anomalies occurring with the lead buyers and suppliers for quality improvements Process/execute efficient commercial comparisons of quotes and choice of best offers across quotations Acquiring & analyzing market intelligence/changes to determine product availability, pricing conditions, understanding/evaluating supply-demand gaps, tracking of key indices affecting the costing. Portal reports Monthly planned production batches and achievements/ or those with delayed flags Quality reports, release lead-time reports etc.

Typology
Strategic Strategic

Measure

Weight
20% 15%

5%

Strategic

Rejection rates (QA report)

5%

Strategic

Financial Resilience, Strategic

RFQs and quote comparisons Purchase Saving (reported by BU Finance)

10% 10%

Financial

Cost reduction negotiations, rejection fate determination, salvage value improvements, cross allocation initiatives to liquidate slow moving goods
Functional audit compliances CHA SLAs and delays at port/airports, incoterms study

PO values per unit across time, STOs with valid use across locations
Audit reports & occurrences of issues Demurrages paid (monthly)

5%

8
9

Strategic
Financial

10% 5%

15

Survey-2: Suppliers Satisfaction

Sample: (Employees participated)
Sample of 60 Suppliers in business for more than 1 year long (of which 24 met personally for responses, 36 emailed to respond of which only 20 responded on email) out of which eventually total 44 responded ..

Questions mainly asked about:

Comfort levels with documentation Comfort levels with conduct and conditions Opinions on long term relationship Opinions on Audits conducted by the firm etc.

Analysis by Chi Square methodology & frequency charts

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Q u estion s Always O f ten S eld om Never 1) W e get correctly stated terms, conditions, and requirements on a PO 59% 34% 7% 0% from Dr. Reddy's Labs. 2) W e get correct timely updates on revision of specifications, revision 50% 14% 27% 9% in drawings etc. sent with the PO from Dr. Reddy's Labs. 3) POs from Dr. Reddy's Labs dont have cumbersome and complex 45% 18% 30% 7% procedures or clauses of time, payment terms and quoting process. 4) Goods supplied against POs from Dr. Reddy's Labs are taken 50% 16% 25% 9% without issues during unloading as per incoterms. 5) Vendor knowledge upgradation and financial help is provided by the 23% 30% 36% 11% Dr. Reddys Labs 6) Contacting people in Dr. Reddy's Labs is easy and not bureaucratic 48% 18% 25% 9% 7) Payment schedule is on or before time & payment teams stick to 57% 11% 18% 14% timelines agreed at Dr. Reddy's Labs. 8) Audits by Dr. Reddy's Labs. are fruitful and improve our standards of 48% 11% 27% 14% working. 9) If your representative visits Dr. Reddy's Labs. they are treated well 61% 9% 23% 7% and get time to meet the contact person with prior appointments. 10) Do you wish to have a long term relationship and business with Dr. Reddy's Labs. And add more value and wealth creation of the firm 59% 11% 16% 14% inline with the company

Survey-3: Employees Internal

Sample: (Employees participated)
Total 20 : Managers (Capex/MRO+RM):- 03+02, Dy. Managers (Capex/MRO+RM):- 02+02 respectively (one who had resigned), A. M (Capex/MRO+RM):05+03, Jr. Managers (Capex/MRO+RM):- 03+00 respectively

Questions mainly asked about:

Organization Design Individual Job Characteristics Internal & Cross Functional Work Environment Senior Management & Direct Supervisor Technology & Communication process Customer Satisfaction (internal & external) etc.

Analysis by Chi Square methodology & frequency charts

18

Questions
Our role s a nd re sponsibilitie s within the S CM te a m a re e xpla ine d prope rly to us during joining or the re a fte r Cle a r re porting struc ture s ha ve be e n e sta blishe d a nd I a m c le a r with my L +1's e xpe c ta tions My skills a nd a bilitie s a re fully utilize d in my c urre nt job I ge t opportunitie s to furthe r de ve lop my skills a nd a bilitie s by a tte nding S CM se mina rs, c onfe re nc e s, tra ining a nd pa rtic ipa tion c ha nc e s in va rious othe r le a rning e ve nts I e njoy be ing a pa rt of this S CM te a m Employe e s c onsult e a c h othe r whe n the y ne e d support. e .g. within S CM te a m's sub divisions, with othe r te a ms like Ac c ounts/Fina nc e , P roduc tion, P roje c ts, P roduc twise de dic a te d othe r me mbe rs e tc . S e nior ma na ge me nt e nc oura ge s c olla bora tion a c ross the orga niza tion I be lie ve se nior ma na ge me nt a ppre c ia te s the work I do My dire c t supe rvisor give s me he lpful fe e dba c k on how to be more e ffe c tive . e .g. S ha re s sta nda rds a nd qua lity of se rvic e my e mploye r e xpe c ts from my job func tion I be lie ve my dire c t supe rvisor a ppre c ia te s the work I do I a m c le a r on how be st to pe rform my work ta sks. e .g. Be nc hma rks, sta nda rds, orga niza tion's a nd te a m's e xpe c ta tions a re c le a r to me My work group ope ra te s e ffe c tive ly a s a unit. e .g. S CM te a m a s a whole or sub divisions like AP I se c tion, Ma rke twise se c tion or P roduc twise se c tion e tc . I re c e ive the informa tion I ne e d to pe rform my job we ll. e .g. Boss c ommunic a te s we ll a nd I dont ha ve to se a rc h for informa tions from othe r te a ms Inte rpe rsona l c ommunic a tion a nd re la tionships c ontribute to orga niza tiona l pe rforma nc e My de pa rtme nt ha s a de qua te tools a nd te c hnologie s to pe rform our work Our te c hnology is re lia ble a nd works whe n we ne e d it to work We unde rsta nd the spe c ific ne e ds of our inte rna l c ustome rs. e .g. Ha ve be e n ma de c le a r a bout the te a ms/e mploye e s de pe nde nt or ha ve dire c t e ffe c t on my job func tion We unde rsta nd the spe c ific ne e ds of our e xte rna l c ustome rs. e .g. S upplie rs, 3 P L logistic se rvic e provide rs, CHA's, Customs de ptt pe ople , distributors, govt a ge nc ie s & institutions whe re we supply our produc ts e tc .

S trongly disa gre e

Disa gre e

Ne ithe r a gre e or Nor disa gre e

Agre e

S trongly a gre e

15% 5% 5% 15% 15% 15% 10% 10% 10% 10% 10% 20% 15% 30% 10% 10% 30% 10%

65% 100% 70% 60% 50% 45% 70% 70% 45% 70% 100% 80% 80% 60% 80% 90% 80% 75%

20%

10% 10% 20% 20% 10% 20%

20% 40% 20% 10%

20%

10%

10% 25%

Recommendations
Create dashboards in SAP NetWeaver system (its feasible and in use by Peers):
Gives real time reference point Alarms and orients the teams proceeds Example dashboard can be replicated

Weak CFT coordination calls defined meetings & review system (as defined in the study)
Supplier upgradation programs & review vendor relation (study BPRI closely and devise a CAPA) Need for a defined review mechanism for:
Financial Indicators Non Financial Indicators Levelwise routine system/operation health check
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