“Harnessing the Power of Supply Chain Metrics”

1. “Harnessing the Power of Supply Chain Metrics” Alan L. Milliken CFPIM CIRM CSCP BASF Corporation Presented to: West Coast Florida Chapter of APICS February 12, 2008

2. Alan L. Milliken CFPIM CIRM CSCP • 20+ years at major manufacturing sites working in Production, Logistics, Process & Quality Control, Industrial Engineering, Training, and Scheduling • 12+ years as a Supply Chain Consultant and APICS Instructor including two years in Mexico City helping BASF Mexicana improve their supply chain. While there, taught Operations Management as guest professor at University of Panamericana in Mexico City. • Identified by an independent consulting firm as one of three APICS members who best answer the question, “What is a Supply Chain Manager?” • Served as an SME (Subject Matter Expert) on the team that developed the new Certified Supply Chain Professional (CSCP) program. • Served as an SME on the team that developed the new Certified Forecasting Professional (CFP) for the Institute of Business Forecasting (IBF) • Engineering Degree from Auburn University and MBA from Clemson University

3. The world’s leading chemical company with revenues of approximately $70,000,000,000 USD in 2007.

4. BASF – 5-Year Stock Performance (PPS in USD) At BASF, “We don’t make a lot of the products you buy, we make a lot of the products you buy better.”

5. Aligning Supply Chain Metrics with Corporate Strategies and Competitive Priorities If you don’t know where you are going, everyway is the wrong way.

6. Value-Based Management Approach The company’s definition of success will define the contents of the performance management system.

7. BASF’s Value-based Management Shareholders receive high ROI Shareholders provide capital 1. Invest in making our Customers better 3. Create Value for our Shareholders BASF 2. Deliver Value to our Customers

8. Value-Based Management Concept Value can be created by: • increasing Profit and/or • reducing capital employed(e.g., inventories, receivables) Profit Reducingcapitalemployed Source: Kurt Bock – Chief Financial Officer – BASF Group

9. Who in the Organization Can Create Value? All employees can create value by optimizing the value drivers in their day-to-day business, e.g., by: • increasing sales through higher prices and/or sales volumes • reducing costs • optimizing inventories and receivables • using production plants optimally Source: Kurt Bock – Chief Financial Officer – BASF Group

10. Value Creation Driver Tree The firm must link Supply Chain Value Drivers to Financial Performance Value Drivers • Pricing • Product mix • Delivery Performance • Innovation (product and business models) + Sales revenue Profit • Variable manufacturing costs • Raw materials costs • Shipping costs • Packaging costs • Transport costs - Variablecosts EVA after costs of capital • Fixed manufacturing costs • Process innovation Fixedcosts - • Inventories • Receivables • Forecast reliability • Payment terms/dunning Working capital Costs of capital X% • New investments • Investments in expansions • De-bottlenecking Fixedassets Source: Kurt Bock – Chief Financial Officer – BASF Group

11. Example: Supply Chain/Marketing & SalesCase study from a BASF business unit • Sustainable reduction in current assets by $120m (= ca. 25%) • Streamlining of product range • Forecast reliability • Batch size optimization • Simplification of global warehouse structures • Shorter payment terms • Improved Inventory Control Sales revenue Profit Variablecosts EVA after costs of capital Fixedcosts Working capital Costs of capital Fixedassets Source: Kurt Bock – Chief Financial Officer – BASF Group

12. Where does Supply Chain Capability Fit in the Planning & Execution Model? Identification of Customers, Products, Competition, Socioeconomic Environment Market & External Environment Analyses Overall missions & goals of the Organization, Recognition of Distinctive Competencies. Corporate Strategy Link Corporate and Supply Chain Strategies The strategy of the corporation and associated supply chain needs drive the Performance Management process. Competitive Priorities(Cost, Quality, Time, Price, etc..) Future Direction (Global Strategy, New Products & Services, etc…) Functional Area Strategies Finance Marketing Supply Chain others Key Performance Indicators Source: Operations Management, Fifth Edition, Krajewski & Ritzman

13. The Roles of Supply Chain Metrics

14. Before Measurement After Measurement Unconsciously Incompetent Metrics “Sometimes, you don’t know what you don’t know.” Donald Rumsfield – Former Secretary of Defense New metrics lead to new questions which create new vision. The Power of Measurements

15. Performance describes what a product or service does or doesn’t do to meet or exceed the customer’s needs. Measurement implies some kind of qualitative or quantitative method for determining if the performance is progressing toward the goal. Performance Measurement Techniques for measuring performance are called “metrics.” The objective of Performance Measurement is to help the firm develop and maintain a competitive advantage based on adding value to products and enhancing customer satisfaction. Metrics can be categorized as Cost-Based, Quality-Based, or Time-Based. A key to meeting objectives is a comprehensive and balanced set of metrics. For example, % Prime Quality (Quality), Inventory Investment (Cost), and Delivery Speed (Time)

16. Strategy Action Measurement The Closed-Loop Measurement System PLAN DO RE-DO CHECK If the results are different than planned, the Strategy, Action, or Measure must be revised.

17. Role of Performance Metrics • provide a quantified definition of what is important and how the organization is performing. • ensure alignment between strategical, tactical, and operational goals & objectives. • facilitate a cross-functional view of relative importance among individual, team, and functional goals & objectives. • motivate the organization towards continuous improvement. • provide a means to link individual and organization performance to reward systems.

18. Balanced Scorecard Approach Performance Measurement must take into consideration four perspectives: “How do we look to shareholders?” Financial Perspective “At what must we excel?” • Contribution Margin • Cash Flow • Operating Result • Return on Assets • Days Sales Outstanding • Value-Added Productivity Internal Perspective Customer Perspective • Forecast vs. Actual Sales • Actual vs. Plan Production • Inventory Velocity • Non-Optimal Shipments • Distribution Expenses • Flexibility & response time • Promise vs. Request Date • Promise vs. Delivery Date • Request vs. Order Date • Order vs. Delivery Date • Actual vs. Plan Ship Date • Ship vs. Order Quantity Innovative Perspective “How do we look to our customers?” • Trends in performance • Rates of improvement • Learn new processes • Learn new technologies • Share knowledge “Can we continue to innovate and improve?” Source: “The Balanced Scorecard” by Norton & Kaplan

19. SCOR Model Relates Metrics to Cross-Functional Processes Strategy: Make-to-Stock Competitive Priority: Delivery Reliability • FCST Accuracy • FG’s Inventory PLAN SOURCE MAKE DELIVER Purchasing Manufacturing Logistics • Supplier OTD • Supplier Fill Rate • Prod. Plan Adherence • Quality-Yield Performance • On-Time Delivery • Fill Rates Source: Supply Chain Council

20. Alignment of Metrics In addition to balancing metrics across multiple perspectives, the organization must align goals & objectives vertically. Note: Visit www.supply-chain.org for more information on the SCOR Model and aligning metrics.

21. Aligning Supply Chain Metrics with Corporate & Operations Strategies: Operations Strategy:(A)Make-to-Order or (B) Make-to-Stock or Customized Service Standard Service Competitive Priorities: ___Delivery Speed ___Customization ___Low Cost ___On-Time Delivery ___Flexibility ___Consistent Quality Profit Margins: ___Higher ___Lower Supply Chain Design: ___Efficient ___ Responsive SC Design Features: ___Flex or Intermediate Flows ___Line Flows ___High Capacity Cushion ___ Low Capacity Cushion ___High Inventory ___Low Inventory ___Minimize Lead Time ___Minimize Cost Key SC Metrics: ___Order Fulfillment Time ___SCM Costs ___Upside SC Flexibility ___On-Time Delivery ___New Product Lead Time ___Inventory Investment

22. Aligning Supply Chain Metrics with Corporate & Operations Strategies: Operations Strategy: (A)Make-to-Order (B)Make-to-StockCustomized ServiceStandard Service Competitive Priorities:Delivery SpeedLow CostCustomizationOn-Time DeliveryFlexibilityConsistent Quality Profit Margins: Higher Lower Supply Chain Design:ResponsiveEfficient SC Design Features:Flex or Intermediate FlowsLine FlowsHigh Capacity CushionLow Capacity CushionHigh InventoryLow InventoryMinimize Lead TimeMinimize Cost Key SC Metrics:Order Fulfillment Time SCM Costs Upside SC Flexibility On-Time Delivery New Product Lead Time Inventory Investment

23. Designing and Implementing KPI’s

24. An effective KPI effort includes two critical phases: Design and Implementation. Active Communication Plan Throughout the Phase I. Design Kick-off KPI Project Understand business strategy & goals KPI Education & review of available tools Assess Existing KPI’s Develop To-Be KPI’s Proactive Efforts to “Teach” the Processes to the business II. Implementation Implement To-Be Evaluate & understand performance gaps Monitor “Live” process Develop plan for continuous improvement Identify lessons learned/facilitation improvement

25. The KPI Team Mission: Develop and implement a “Scorecard” to monitor and improve overall business performance. KPI Team Sponsor: Controller Team Objectives • Determine performance metrics for the NAFTA Business • Establish data collection and reporting processes • Develop a target setting process including tolerances • Establish detail profiles for each metric • Implement corrective action/decision making process • Establish clear roles & responsibilities • Develop process to reconcile metrics across levels of the organization, sites, & functions • Provide training and documentation Finance Manufacturing IT Human Resources Leader Leader Facilitator Facilitator R&D/Engineering Purchasing Mktg./Sales Logistics

26. Develop a High-Level Project Plan “Take care to get what you like, or you will be forced to like what you get.” George Bernard Shaw

27. Identify and Assess Current Metrics • Is the metric SMART? (Specific, Measurable, Actionable, Relevant, Timely) • Is the metric part of a balanced approach? • Does the metric support strategic and tactical level goals & objectives? • Does the metric provide benefit to the organization (motivates behavior, serves as focal point for improvement, highlights performance to better practices, etc...) It is not only important to “measure things right” but also to “measure the right things.” old axiom

28. Design a Business Level Balanced Scorecard Generate a list for review, discussion, and decision making:

29. Example of Balanced Scorecard The business level scorecard should contain 10-15 metrics representing the various perspectives and supporting overall strategic objectives. Include limits to define when action is required. Use Red-Yellow-Green or Good-Fair-Poor to rate status.

30. Example of Balanced Scorecard

31. Develop a detailed KPI Profile for each metric: Metric Profile Balanced Scorecard Perspective: Select the perspective - Financial, Customer, Internal or Learning & Growth Business Process Category: What business process is being measured?- Customer service, Inventory Mgt, Forecasting, Prod’n Planning, Warehousing, Distribution, Freight, Training, Procurement, etc. Owner: Who is accountable for the result of this KPI? Document Name & Function: Data Coordinator: Who is responsible for gathering the data for the KPI? Document Name and Function. Data Source: Where does the information come from? Financial Systems, EDW, DW, SAP, Controller’s Book, etc. Definition: What is measured? What are the primary components. Fit into one sentence. Purpose: Why do we measure this KPI? What is the desired outcome? Frequency: How often is this metric reviewed? Hourly, Daily, Monthly, Quarterly, Annually, etc. Level of Detail: What level of information is available? By product, project group, business, business group, country, customer, customer segment, supplier, location, etc. Calculation: Document the formula and any special components - average, count, mean absolute deviation, percentage, differences, summation, etc. Baseline Data: What year, month, or other time period was used as the baseline? Performance Targets: What performance do you require at the end of the calendar year? How is this value determined? - historical, business plan, estimates, benchmarks, capacities, etc. Tolerance: What is the allowable error to the target? Data Availability: When is the data available for updating? Data Source Details: Describe in more detail where the data comes from - EDW tables, queries, files, external sources, etc. Comments: Include possibility of automating data collection, issues around gathering the data, potential resources for the information. Include any other information that tells the user more about the KPI.

32. The Use of Supply Chain Metrics “Sometimes, you do know what you don’t know.” Donald Rumsfield – Former Secretary of Defense

33. Uses of Performance Measures • Communicate expectations • Establish metrics • Measure and control key factors • Track changes in performance • Control operations To ensure all members of the firm are working toward the same goals. Aligned with focus goals and objectives. Compare actual-to-target and take actions as needed. Detect trends and develop plans accordingly. To obtain desired behaviors and results.

34. Using Metrics to Drive Performance - Manage-to-Target Process - Define KPI´s, Targets, & Tolerances Reward and Recognize Step 2 Step 3 Generate KPIs Compare to Targets and Forecasts Step 4 Perform Work Determine Root Causes Step 1 Step 6 Step5 Implement Corrective Actions Set/Modify Action Plan

35. Characteristics of EffectiveMeasurement System Don’t just measure cost or even revenue, cost, & profit. Include different perspectives such as service, quality, innovation, etc... • Measure more than one function or activity • Can be used for decision-making • Economical to obtain and apply • Easy to understand and interpret • Linked to strategy • Inspires the desired response Include trends as well as absolute measures. Leverage automation as much as feasible. Avoid metrics requiring people to write things down or tally manually. Use KISS principle. Avoid metrics which require interpretation for scorekeeping. For example, if focus of strategy is low-cost and delivery reliability, don’t emphasize responsiveness or flexibility. Is progress toward goals being made? Smart-Measurable-Actionable-Relevant-Timely

36. Some General Principles of Measurements For example, don’t give individual’s productivity goals that encourage throughput at the expense of quality. • Don’t confuse process measures with people measures. • People at all levels of the firm do better when they choose their own measures (subject to strategy checks). • A few well-chosen measures are better than many measures—use Pareto’s Law. • There is a difference between data and information. People are more enthusiastic and dedicated to metrics which they select. They must understand the competitive strategies and associated goals. Avoid, metric of the week syndrome and conflicting metrics which send confusing signals. All firms create a great deal of data. For example, movement data, inventory data, production data, etc… . To convert this data to information the data must be processed into something meaningful and measurable. For example, month-end inventory units are translated to inventory dollars using standard costs and then aggregated and compared with goals.

37. Aligning Performance and Behavior What motivates you? • Motivators inspire specific behavior • Demotivators discourage specific behaviors • Considerations • Intensity of response • Duration of response For example, unattainable goals and metrics which focus on the individual instead of the process can de-motivate. What makes you try the hardest? For example, annual vs. point-in-time metrics.

38. Sample KPI’s

39. Whirlpools Global Performance Metrics • Total System Inventory (Asset Turnover & Expense) • Total System Transportation Cost (Expense) • Total System On-Time Delivery Performance (Service and Revenue) • Total Cash-to-Cash Cycle Time (Working Capital Expense) The entire management team is recognized or motivated based on these performance metrics. Tradeoffs that improve the whole at the expense of individual entities are common.

40. BASF’s Global Performance Metrics • Days Invested in Inventory (DIV) • On-Time Delivery - Capability (Did we say yes to original request) - Reliability (Did we meet our commitment) • Forecast Accuracy (S&OP Level) • Planned vs. Actual Production (S&OP Level) Service – Costs - Inventory

41. Customer Service Scorecard – BU Level

42. Days Invested in Inventory

43. Quality of Inventory

44. Forecast Accuracy (Prod-Pkg-Loc Level)

45. 2007 BASF Corporation Scorecard

46. “It ain’t what you know, it’s what you think you know that just ain’t so.” Satchel Paige