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G00270870

Supply Chain Guide to Metrics Hierarchies for


Manufacturers and Distributors
Published: 6 November 2014

Analyst(s): Debra Hofman

The supply chain metrics that many companies are trying to work with now
are simply the sum total of functional metrics. Supply chain centers of
excellence should use this research to define and implement the supply
chain metrics that matter.

Analysis
Metrics continue to be challenging for Gartner's clients, and we typically hear of the following
issues:

Too many metrics

Inconsistencies in calculating the metrics

Endless debate over the definitions

Gaming the system

Lack of access to credible data

Disagreement over how to interpret the data

No single version of the "truth"

Metric "islands" of unlinked data

However, it's the first one that comes up over and over again: "We don't lack for metrics. Just the
opposite, we're awash in metrics. The question is, which ones really matter? Which ones should we
focus on to get real value?"
The reality is that most companies have not really designed their metrics portfolios. Typically, the
metrics have "grown up" from inside the functions that make up what we now call "supply chain":
sourcing and procurement, manufacturing, logistics, and planning. Each function had its own
cornucopia of metrics, and when those functions were pulled together under an umbrella called
"supply chain," the metrics came along with them. The supply chain metrics that many companies
are trying to work with now are simply the sum total of all those functional metrics, and it's not
working.

Too many metrics and a lack of coherent organization to them leaves companies without the ability
to find correlations in the data that will give them real insights. Organizations will often hit their
metric targets, but miss the high-level corporate goals, not understanding why. Moreover, it's
expensive to track and maintain hundreds of metrics, particularly when no value seems to be gained
by doing so.
Companies need to step back and actually design the right metrics portfolios. These metrics need
to be aligned so the organization as a whole can achieve the overarching goal of the end-to-end
supply chain: profitable service that enables growth.
What's needed are three levels of aligned metrics, as shown in Figure 1.
Figure 1. Three Levels of Aligned Supply Chain Metrics

Level 1:
Executive
Dashboards

Alignment

Forecast
Accuracy
Perfect
Order

Level 2:
End-to-End
Supply Chain

Cash to Cash
AP
Supplier
Quality
Cost
Detail

Level 3:
Functions

SCM
Cost

Supply
Management

Inventory Total
Supplier
On Time

Production
Schedule
Variance

Raw
Material
Inventory

Plant
Utilization

AR
Purchase
Costs

WIP + FG
Inventory

Manufacturing

Direct
Material
Costs
Order
Cycle
Time

Perfect
Order Detail

Logistics

AP = accounts payable; AR = accounts receivable; RM = raw material; WIP = work in progress; FG = finished goods
Source: Gartner (November 2014)

The three levels include:

Level 1 (the top level) contains the handful of supply chain metrics an executive should use to
track the high-level performance of each supply chain.

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Level 2 (the middle level) contains a midsize portfolio of metrics from across the supply chain. It
contains the right number of metrics to get a good sense of what's happening across the endto-end supply chain not so many that you get buried in the weeds, and not so few that there
isn't enough information on which to act. At this level, you can see enough to know where you
need to dive into the more detailed metrics in Level 3, and what you're looking for there.

Level 3 (the bottom level) contains the detailed functional metrics for source, make and deliver.
At this level, you can dive into the details, based on guidance from what you saw in the first two
levels. For example, suppose you saw in the Level 1 metrics that inventory is too high. In
addition, suppose that when you look at the Level 2 metrics, you see that one of the sources of
excess is in raw material inventory, and that it's likely related to poor supplier on-time delivery.
You can then look at the Level 3 metrics for sourcing and procurement to understand better
why suppliers are not on time and fix the issue, which, in turn, will help the inventory problem.

This approach is fundamentally different than the way most companies have historically used
metrics. Rather than starting the analysis by trying to make sense of all the detailed metrics in Level
3, start with the outcome and work back (or down in this case) in a structured and directed way.
There are three key points to take away here:
1.

The goals for the Level 3 metrics must be aligned with the goals of the end-to-end supply chain
in Levels 2 and 1. The procurement, manufacturing and logistics groups should not be focused
only on their own metrics. So, for example, procurement cannot be measured only on unit
costs; it must also be measured on total supply chain cost and perfect order performance.

2.

Companies operate more than one supply chain. Therefore, they need to set targets and
measure by supply chain. The metrics are the same for each supply chain. What's different are
the targets. For example, the cost targets for an efficient supply chain will be more stringent
than those for a responsive supply chain.

3.

Companies should not aim to be best in class on every metric. Trying to be best in class on
every metric means that each function that makes up the supply chain is trying to be the best at
what it does as a silo, and typically, it will do so at the expense of another function. Instead,
focus the entire supply chain on delivering a profitable perfect order, and figure out what tradeoffs you will make to get there (see "Setting Supply Chain Targets: What Does Good Look
Like?").

Gartner has published the metrics for Levels 2 and 3, and these are summarized below. These
documents help define the metrics that matter for each portfolio in the end-to-end supply chain,
and how they are aligned:

Level 2 metrics are outlined in "The Hierarchy of Supply Chain Metrics: Diagnosing Your Supply
Chain Health."

Level 3 metrics have been published in three documents to date:

"Use the Hierarchy of Supply Management Metrics for Strategic Alignment and Enhanced
Performance"

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"Aligning Manufacturing and Supply Chain Performance, Part 2: The Hierarchy of


Manufacturing Metrics"

"Align Supply Chain and Logistics Performance With the Hierarchy of Logistics Metrics"

Note: These hierarchies are specific to manufacturers and distributors. Gartner has also published
metric hierarchies for retail, healthcare, and product development that provide additional industry
vertical and product perspectives (see "Retail Supply Chain Leaders Metrics Reflect Today's
Multichannel Environment," "The Hierarchy of Healthcare Supply Chain Metrics for IDNs" and
"Product Launch Dashboards, Part 1: The Hierarchy of Product Metrics" for details).

Research Highlights
The Hierarchy of Supply Chain Metrics
The Hierarchy of Supply Chain Metrics (see Figure 2; "The Hierarchy of Supply Chain Metrics:
Diagnosing Your Supply Chain Health") is a three-tiered model of metrics. The top tier assesses a
company's supply chain health, while the two successive tiers diagnose the root cause of
performance gaps and provide insight for corrective action:

Strategic Benefit: The top tier of metrics is the 50,000-foot level, at which an executive can
assess, with just three metrics, the overall health of the supply chain and the high-level tradeoffs a company might be making. The demand forecast is at the top, not because it's an
outcome or a goal, but to highlight what an important driver it is of performance back through
the supply chain. Below it are the two metrics that, taken together, describe the outcome of any
supply chain: perfect order, a measure of responsiveness; and supply chain management cost,
an end-to-end cost metric that, taken as a percent of revenue, measures the profitability of the
supply chain. The goal of any supply chain and the purpose of the metrics in the next two
tiers is to deliver profitable service that enables growth by finding the right balance between
these two metrics for each supply chain a company operates.

Working Capital: The middle tier of metrics is the 25,000-foot view. This level uses a composite
cash-flow metric to provide an initial diagnostic tool. It's a time metric, and it's the components
of cash to cash that are useful in starting to look at the interdependencies between metrics. Are
your inventories high or low? Is your accounts payable balanced with your accounts receivable
times?

Operational Execution: The bottom tier uses a variety of metrics that support effective root
cause analysis and allow surgical, highly efficient corrective action. Metrics in this tier include
supplier and operational effectiveness indicators.

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Figure 2. Level 2: The Hierarchy of Supply Chain Metrics

Forecast
Accuracy

Strategic
Benefit

Assess

Perfect
Order

SCM
Cost

Cash to Cash

Working
Capital

AP

Supplier
Quality

Operational
Execution

Inventory Total

Supplier
On Time

RM
Inventory

Diagnose

AR

Purchase
Costs

Direct
Material
Costs

Correct
Cost
Detail

Production
Schedule
Variance

Plant
Utilization

WIP + FG
Inventory

Order
Cycle
Time

Perfect
Order Detail

AP = accounts payable; AR = accounts receivable; RM = raw material; WIP = work in progress; FG = finished goods
Source: Gartner (November 2014)

The critical message of the hierarchy is this: It's the interdependencies that make the metrics
actionable. Each metric by itself is of limited use. It's when you look at them together that you can
see the story of a supply chain emerge that allows you to take action. And it's when you look at
them together that you can consciously manage the trade-offs across the end-to-end supply chain.
While many companies already measure some version of these metrics, they typically don't look at
the metrics together in this way to find the right balance that will enable them to orchestrate a
profitable response to demand.
Refer to the Gartner Recommended Reading section at the end of this document for additional
research that describes how to implement a hierarchy of metrics in your organization.

The Hierarchy of Supply Management Metrics


The Hierarchy of Supply Management Metrics (see Figure 3; "Use the Hierarchy of Supply
Management Metrics for Strategic Alignment and Enhanced Performance") helps connect supply
management's performance with the rest of the supply chain. The term "supply management" here
includes strategic sourcing and procurement/purchasing. Supply management functional metrics

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help chief procurement officers (CPOs) and their staff contextualize and link strategic sourcing and
procurement's performance with supply chain metrics that measure the health of the company's
end-to-end value chain.
Figure 3. Level 3: The Hierarchy of Supply Management Metrics

Supply
Management
Value

Demand
Volatility

Assess

Supply
Mgmt.
Perfect Order

Supply
Mgmt.
Costs

Working Capital Components

Working
Capital
Management

AP

Inventory
(Consign/
Bail and SMI)

Supply
Liabilities

Diagnose

Supply Management Components

Supply
Management
Excellence

RFx
Cycle
Time

%
Supplier
That Are
80%
Spend

Spend:
% Rev. &
% Under
Mgmt.

%
Supplier
YOY Cost
Change

%
Supplier
Visibility/
Collab.

%
Suppliers
Compliant

Correct
Supply
Mgmt.
Perfect
Order Detail

S2S/P2P
Cycle
Time

Legend: Supply
Management
Components

%
Supplier
OTD

Strategic
Sourcing

%
Supplier
Quality

% Supply
Mgmt.
Spend
on RFx

Procurement

Supply
Mgmt. Cost
Detail

Combined

AP = accounts payable; SMI = supplier-managed inventory; RFx = request for proposal or information; YOY = year over year; S2S =
source to settle; P2P = procure to pay; OTD = on-time delivery
Source: Gartner (November 2014)

The Hierarchy of Supply Management Metrics is divided into three tiers:

Supply Management Value: Consistent with the end-to-end supply chain hierarchy, the top of
this hierarchy contains three metrics that allow companies to assess the overall health of supply
management. Demand volatility is at the top of the pyramid to emphasize its impact on the
supply management function, typically expressed in the supply portion of the replenishment
plan. The outcome is the balance between service and cost a profitable supply management
perfect order in this case and it reflects the contribution of the supply management function
to the goals of the end-to-end supply chain. Together, these two metrics indicate overall supply
management value that is, contributions to bottom-line margins and top-line revenue growth.

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Working Capital Management: The middle tier of metrics accounts payable (AP), inventory
and supply liabilities represents how supply management leverages long-term commitments,
assets and working capital resources to enhance corporate flexibility and liquidity, and to
enable profitable demand, supply/replenishment response and financial compliance. These
metrics complement the top tier, providing insight into overall supply management value.

Supply Management Excellence: The lower tier of metrics shown in two rows ensures
that a foundation of business processes and best practices is in place to create the positive
performance measured at the upper tiers. The metrics shown are some of the most commonly
used across multiple styles of supply management. The upper row contains metrics related to
strategic sourcing. The lower row includes two groups of excellence metrics: procurement and
combined details related to perfect order and cost. These metrics require additional levels of
submeasures and business processes to ensure that the right methods and procedures are in
place.

The Hierarchy of Manufacturing Metrics


The Hierarchy of Manufacturing Metrics (see Figure 4; "Aligning Manufacturing and Supply Chain
Performance, Part 2: The Hierarchy of Manufacturing Metrics") helps connect manufacturing's
performance with the rest of the supply chain. The three tiers in this hierarchy include:

Manufacturing Reliability: Consistent with the other hierarchies, the top of the manufacturing
hierarchy includes three metrics that allow companies to assess the overall health of
manufacturing operations. Demand volatility is at the top of the pyramid here as an input to
emphasize its impact on the manufacturing function. Underneath, the balance between the two
metrics of service and cost a profitable manufacturing order here is the goal, and it
denotes the contribution of the manufacturing function to the overall goals of the end-to-end
supply chain.

Cycle Times: In the supply chain and supply management hierarchies, the middle tier is
referred to as "working capital," and the metrics contained in it relate to time. Here, the focus is
the overall cycle time of an order in production. This can represent how quickly a plant, a cluster
of plants with similar capabilities, or the manufacturing network can convert demand for
capacity and resources into a profitable demand response. They complement the top-tier
metrics and provide insight into manufacturing flexibility.

Manufacturing Excellence: The lower tier contains the metrics that reflect the detailed
operational activities, which result in the outcome at the top of the hierarchy. The metrics shown
are some of the most commonly used across multiple styles of manufacturing to depict the
stability of manufacturing (for example, overall equipment effectiveness [OEE]). These are
primarily metric categories that are made up of additional levels of submeasures.

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Figure 4. Level 3: The Hierarchy of Manufacturing Metrics

Demand
Volatility

Manufacturing
Reliability

Manufacturing
Perfect Order

Assess

Mfg. Cost

Cycle Times

Cycle Times

RM
Inspect

Req. RM
to Site

Stage
Times

FG
Inspect

FG
Release

Diagnose

Operations Excellence
Asset
Performance

Manufacturing
Excellence

Schedule
Adherence

RM, WIP +
FG Inventory

Right
First
Time

Correct
Perfect
Order
Detail

Asset
Measures

Supplier
Performance

Events

Production
Cost Detail

RM = raw material; FG = finished goods; WIP = work in progress


Source: Gartner (November 2014)

The Hierarchy of Logistics Metrics


The Hierarchy of Logistics Metrics (see Figure 5; "Align Supply Chain and Logistics Performance
With the Hierarchy of Logistics Metrics") helps connect the performance of the logistics group with
the rest of the supply chain. The term "logistics," as used here, represents full logistics and
distribution management, including inbound and outbound transportation, warehousing and
distribution, international logistics, and network inventory holding costs.

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Figure 5. Level 3: The Hierarchy of Logistics Metrics

Supply Chain
Alignment

Supply Chain
Planning
Accuracy
and
Effectiveness

Assess

Profitable Delivery to Service Expectations

Top Logistics
Performance

Timeliness

Quality

Cost

Diagnose

Perfect Order
Lead
Time
Cycle
Time

On-Time
Details

Fill
Quality

Logistics
Costs

Warehousing Transportation
Costs
Costs

Operations
Detail
Delivery
Operations
Effectiveness

Correct
Quality
Details

Inventory
Quality

Inventory

Labor
Efficiency
and
Productivity

Asset
Efficiency
and
Productivity

Asset Costs

Source: Gartner (November 2014)

The three tiers of the Hierarchy of Logistics Metrics are:

Supply Chain Alignment: The structure of this hierarchy is essentially similar to the other
functional hierarchies, but some differences in emphasis were required. The perfect order for
supply management and manufacturing reflects each function's ability to deliver service to the
next node in the supply chain. For logistics, the next node in the supply chain is the external
customer, and that is what the logistics function is measured by. However, delivering a perfect
order to the external customer is the end result of all the activity upstream in the supply chain,
not just the activity of the logistics group. Almost by definition, logistics is a service function
servicing both the customer and the business. As such, the ability of the logistics group to
deliver on its commitments is highly dependent on how well it is aligned with the rest of the
supply chain.
The supply chain processes upstream to logistics work primarily against a plan or estimate of
what demand will be. Logistics works on actual demand. It's at this junction that the fulfillment
of "actual" demand gets compared against what the rest of the supply chain "planned" for
demand. To reflect this reality, supply chain alignment is called out as the top tier of the
logistics hierarchy. The metrics associated with supply chain planning accuracy and
effectiveness include: (1) operation planning demand visibility and all the ensuing supply

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planning that occurs based on that; and (2) strategic planning supply network design
decisions, that is, where and how customers are serviced, where the plants and distributions
centers are located, and where materials and components are sourced. Incremental
improvements or deficiencies in these areas can have a dramatic impact on the ability of
logistics to deliver the perfect order to the customer as well as on the cost to do so.

Top Logistics Performance: Similar to the other hierarchies, the ultimate outcome of the
logistics function is to deliver profitable service. Consequently, at this level are the two metrics
that reflect logistics' need to maintain equilibrium between service and costs: the perfect order
metric, with its timeliness and quality components, next to the logistics cost metric.

Operations Detail: This tier contains the detailed metric categories needed to execute against
the goals at the top. All of the metrics within these operational metric categories roll up to one
of the foundational metric categories of timeliness, quality or cost. The metric categories here
represent the most commonly used measures in logistics. These metric categories aggregate
additional detailed submeasures that may be broken down into further levels such as business
unit or facility locations, for example.

These hierarchies provide a set of frameworks that companies can use as a starting point to
organize and implement their own metrics programs. However, implementing a successful metrics
program is about more than the metrics themselves. It also requires changes in tools, processes,
people and governance structures to be successful. The Gartner Recommended Reading section
below provides additional best practices, a Toolkit and case studies to help you on your
performance management journey.

Gartner Recommended Reading


Some documents may not be available as part of your current Gartner subscription.
"Toolkit: Building a Hierarchy of Supply Chain Metrics for Your Organization"
"Implement the Hierarchy of Supply Chain Metrics With a Performance Management Architecture"
"Best Practices in Defining Supply Chain Metrics"
"Best Practices in Supply Chain Measurement: Pfizer Rises to the Challenge"
"Setting Supply Chain Targets: What Does Good Look Like?"
"Five Steps to Best Practices in Supply Chain Benchmarking: From Numbers to Action"
"Retail Supply Chain Leaders Metrics Reflect Today's Multichannel Environment"
"The Hierarchy of Healthcare Supply Chain Metrics for IDNs"
"Product Launch Dashboards, Part 1: The Hierarchy of Product Metrics"

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Evidence
This document is based on ongoing primary research in the area of supply chain performance
management, and hundreds of inquiries on the topic over the past year.

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