1. KPIs: Improving Supply Chain Performance Management
Northeast Supply Chain Conference and Exposition Framingham, MA
September 19 – 21, 2004
Tim Dolan, C.P.M.
Manager, New Product Support
Global Procurement Organization
The Gillette Company

2. Agenda
The Gillette Company Overview
Key Performance Indicators – What Are They?
The Case for Measuring Indirect KPIs
Developing Indirect KPIs
Sample KPI Scorecard
Guidelines and Benefits

3. Gillette History
Founded in 1901 by King C. Gillette
Boston, Massachusetts

4. World-Class Brands, Products, People
$9 Billion in Sales (2003)
Multinational Corporation
Gillette - Recognized Brand Worldwide
32 Manufacturing Centers
15 Countries
200+ Markets
Approximately 29,000 employees worldwide
4 primary Business Units
Grooming
Blades & Razors
Personal Care
Batteries
Oral Care
Appliances
Innovative: 47% of Sales from Products less than 5 years old

5. Gillette Products

6. What are Key Performance Indicators (KPIs)?
Price
Delivery
Quality
Total product cost
Performance to schedule
Product reliability and consistency
KPIs are measurements of a supplier or service provider’s performance in key activity areas

7. KPIs have historically been used to measure direct material suppliers’ performance
Price
Cost reductions
Cost competitiveness
Delivery
Quantity
On-time delivery
Paperwork
Shipment condition
Quality
Rejected and nonconforming
Process capability, data/samples

8. History of Indirect KPIs
Jim Kilts’ “Circle of Doom”
Centralize procurement
Implement Strategic Sourcing (SSI)
Supply Chain
Trade Practices
Financial Practices
KPIs sustain strategic sourcing savings
Source: “Jim Kilts Is An Old-School Curmudgeon”, Fortune, December 30, 2002

9. What is Indirect Spend? Computer/Telecom Energy/Utilities
Printing/Marketing/Advertising
Employee Benefits
Office Products
MRO
Travel
Facilities
Professional Services
Fleet
Logistics
Capital Equipment
Indirect spend is the sum of expenditures for goods or services that are not components of the end product or service delivered to a customer

10. The average indirect spend for Fortune 500-size companies is 50% of total spend
Utilities/ Engineering Construction
Consumer Products
Aerospace, Defense, DoD and DoE Contracting
($ Millions)
Source: CAPS Critical Issues Report, September 2003

11. Spend for services accounts for more than half of a company’s indirect spend
Purchase Spend as a Percentage of Total Purchase Spend
Median spend = $434M
Total
Marketing IT
Pro Services
Indirect Goods 21%
Construction/Eng
Services 33%
Inventory
Manufacturing
Direct Material 51%
Other:
Accounting
Facilities Legal
Logistics
Real Estate
Temp Labor
Travel
Source: Defining and Determining the “Services Spend” in Today’s Services Economy, CAPS, July 2003

12. Participants in a recent CAPS survey expect indirect spend for services to increase
Indirect Spend - Services
($ Millions)
= Projected
5-yr CAGR = 5%
Source: Services Purchases: Not Your Typical Grind, Inside Supply Management, September 2003
Note: Chart represents respondents’ median spend

13. Developing KPIs for Indirect Suppliers

14. Cost Competitiveness and Continuous Improvement Customer Satisfaction
Evaluation criteria for indirect suppliers can be grouped into three categories
Contract Compliance
Cost Competitiveness and Continuous Improvement
Customer Satisfaction
Definitions of Supplier Criteria
How well does the supplier deliver on the terms, conditions and prices agreed to in the contract?
How well does a supplier satisfy our customers from a product or service quality perspective?
How cost competitive is the supplier from an industry perspective and from a historical perspective?
How well does the supplier continue to enhance the product/service, process or cost?
Ultimate objective is to be able to quantifiably measure and compare individual supplier’s performance

15. Specific KPIs can be tailored to meet the needs of various suppliers
Contract Compliance
Customer Satisfaction
Cost Competitiveness and Continuous Improvement
Attributes
Actual cost vs. budget
SLA responsiveness
On time deliveries
Return rate
Order and billing accuracy
Average lead-time
Customer Surveys
Technical Support
Supplier vs Industry
Supplier vs Other Benchmark
Ecommerce capability
Supplier Partnership Initiative
Cost Reduction Target
Objective and subjective attributes are necessary for measuring indirect suppliers

16. Customer Satisfaction Cost Competitiveness and Continuous Improvement
Indirect KPIs can use a 1 to 5 scale to score KPIs and a weighting system which allows some flexibility, but keeps weights significant and relatively consistent
Indirect Supplier Evaluation Criteria
Contract Compliance
Customer Satisfaction
30-50%
20-30%
100%
Cost Competitiveness and Continuous Improvement =
Standard Scores
5 = Superior – far exceeds expectations
4 = Exceeds expectations
3 = Meet expectations
2 = Does not meet expectations
1 = Needs improvement; significantly does not meet expectations
Allowing flexibility with category weighting ensures that the KPI scorecard is tailored to meet the unique needs of the measured supplier

17. Contract Compliance

18. Contract Compliance Attributes
Actual costs versus budget
Service level results
On time delivery
Return rate
Order and billing accuracy
Average lead-time
Contract compliance attributes mirror the supplier’s contractual commitments

19. Customer Satisfaction

20. While KPIs measured with objective data are the most reliable, it can be argued that they do not capture the entire picture in regards to supplier performance
Traditional KPI constraints:
Difficult to evaluate the interactions of supplier personnel with customers
Quality can only be measured in regards to damage or breakdown, and is difficult to measure for services
Strong traditional supplier KPI data does not necessarily indicate whether or not the customer is satisfied
Customer Satisfaction Surveys provide mechanism to help evaluate supplier performance

21. Customer Satisfaction Surveys capture the customer‘s opinions in regards to supplier performance.
Supplier Interaction: Infrequent ___ Moderate____High ____
Questions:
I feel the supplier provides high quality goods and services.
I feel the supplier provides high value for the cost.
I would recommend this supplier to others.
When I have questions, this supplier responds in a timely manner.
If there is an issue, this supplier resolves the issue in a timely manner.
If there is an issue, this supplier resolves the issue to my satisfaction.
In my opinion, this supplier deserves recognition as a top supplier.
Scale:
1: Strongly Disagree
2: Disagree
3: Neutral
4: Agree
5: Strongly Agree
Customer satisfaction surveys can be a primary determinant of customer satisfaction

22. Mitigating Techniques
A comprehensive supplier measurement system can mitigate customer satisfaction survey limitations
Issues
Customer satisfaction tends to be overwhelmed by bad experience, even if the bad experience was not the supplier‘s fault
Most recent experience is recalled; not overall supplier performance
Surveys tend to be subjective
A single negative response can skew results
Response rate tends to be low
Mitigating Techniques
Evaluate responses in relation to other KPI data. Conduct enough surveys to mitigate this effect
Adjust weighting for Customer Satisfaction Survey where commodity has a great deal of objective data
Utilize statistically significant sample size and possibly discard highest and lowest scores
Target key customers with vested interest and explain significance of KPI

23. Cost Competitiveness and Continuous Improvement

24. Benchmarking establishes cost competitiveness
Supplier vs industry
Supplier vs other benchmark
Standard or target prices
“Should” cost prices
“Price paid” indices
Consumer Price Index (“CPI”)
Ecommerce capability
Comparing supplier pricing against benchmarks assists in avoiding “price creep”

25. Cost Competitiveness and Continuous Improvement Guidelines
In addition to KPIs that measure cost versus competition and industry standards, continuous improvement, supplier process improvements and/or cost saving targets can be established
Define baseline spend that generates the savings target
Cost Saving Guidelines
5 = Superior – far exceeds expectations 6% or more
4 = Exceeds expectations 4 – 6%
3 = Meet expectations 2 – 4%
2 = Does not meet expectations 0 – 2%
1 = Significantly does not meet expectations 0%

26. Collecting the Data

27. Evaluate the costs/benefits of each data collection method available
Unbiased company collected data electronically
Data collected / tracked by supplier
Recommended
approach
Cost to collect data
Data collection is the most difficult and time-consuming activity in the KPI process. However, it is integral to a successful KPI program.

28. A wide range of sources can provide measurement data
Data Warehouse
ERP Systems
Supplier-provided reports
Third-party data
Industry benchmarks
Customer Satisfaction Surveys
Attaching the data and documentation to the scorecard validates scoring and makes it possible for the supplier to take corrective action

29. The KPI Scorecard

30. Sample Scorecard - Temp Labor KPIs

31. Customer Satisfaction Cost Competitiveness and Continuous Improvement
An overall score is calculated and used to measure indirect suppliers’ performance
Indirect Supplier Evaluation Criteria
Contract Compliance
Customer Satisfaction
Cost Competitiveness and Continuous Improvement
Weight X Score = Indirect Supplier KPI Score
Weight = 30%
Score = 4
Weight = 30%
Score = 4.3
Weight = 40%
Score = 3.5
Indirect Supplier
KPI Score
EXAMPLE
3.89

32. Guidelines for developing KPIs
KPI Guidelines
Determine criteria for identifying which suppliers will be measured by KPIs
What gets measured, gets done. Be clear on what you’re measuring and why.
Develop jointly with suppliers to achieve buy-in
Align KPIs with your goals and objectives
Develop KPIs that are objective and measurable
Limit KPIs to a manageable number
Communicate results to suppliers and management on a timely basis
Complete the process and follow-up on results and corrective actions
Business Benefits
Generates supplier improvements that benefit you
Justifies supplier’s inclusion in your supply base
Identifies need to re-source supplier
Strengthens and improves supplier relationships
Develops suppliers
Rewards for performance
KPIs drive continuous improvement and cost savings

33. Questions