Supply Chain: Example of Strategy Scorecard with KPIs

A perfect supply chain is resilient, transparent, aligned with other functions, and quantified by KPIs.

Supply Chain Management (SCM) is a core activity of any organization that deals with production or distribution. The label “strategic” is often misused in business literature, but supply chain deserves it. SCM overlooks:

• Procurement
• Warehousing
• Logistics
• Quality assurance and control
• Sustainability

Most important: the supply chain aligns all relevant sub-strategies and stakeholders with an overall organization’s strategy.

As any other strategy, a supply chain strategy can be presented on a strategy map divided into the “drivers” (Learning & Infrastructure and Internal perspectives) and the “outcomes” (“Customer” and “Finance” perspectives).

A number of studies mentioned below analyze the emerging trends in the field of supply chain management and suggest “the drivers” for the supply chain strategy:

• Resilience
• Demand analysis
• Transparency and Alignment
• Integrating ESG perspective
• Talent retention

An example of the strategy map for supply chain. Source: Supply Chain Strategy.

The decomposition of “the outcomes” can be done by stakeholders:

• Financial stakeholders
• Stakeholders related to internal functions: warehousing, logistics, sustainability, quality
• Stakeholders related to external functions: suppliers, regulators, and
• Customer stakeholders

Below, we explore the drivers and outcomes of the supply chain strategy.

Improving Resilience: Higher Inventories, Multiple Sources, Nearshoring

The impact of the pandemic on business continuity and the supply chain was a trigger that put resilience and scenario planning back on the table.

Leading advisory and research firms (see, for example, this report by McKinsey¹ and this article by Gartner²) suggested their clients focus on supply chain resilience with these key themes:

• Higher inventories
• Multiple sourcing
• Regionalisation / Nearshoring

While the change directions are clearly defined, the main challenge is to align these new strategies with existing supply chain strategy, risk models, and cost optimization strategies. No surprise that in the same survey McKinsey found a gap between respondents’ ambitions and actions.

Implementation

To implement these sub-strategies, follow the steps of the strategy implementation guide:

• Analyze the stakeholders involved and value metrics to quantify their ambitions
• Formulate high-level strategic goals
• Create a functional scorecard to do value-based decomposition: define specific sub-goals, change initiatives, risks, and performance indicators.

These steps need to be repeated for all sub-strategies: higher inventories, multiple sourcing, regionalisation.

• Finally, align³ the created functional scorecards with the Improving resilience goal

In our template, the goal of Improving Resilience is automatically quantified by normalized performance of its sub-strategies (to be replaced with links to the created functional scorecards). Additionally, we can assign weights to the sub-strategies to reflect the impact on overall resilience.

The KPIs from the Finance perspective will help to track the impact of implementation:

• Cash conversion cycle (CCC)
• Inventory carrying cost, $
• Cost of resilience initiatives, $
• Expected cost avoidance, $

Proactive Resilience Management: PESTEL Analysis and Scenario Planning

The mentioned approach to resilience is reactive in its nature, so, to quantify the resilience, we used strategies suggested in response to past disruptive events.

To some degree, the suggested resilience strategies will be relevant in other cases, like, for example, extreme weather events, but if an organization wants to be proactive in supply chain management, it should start thinking from first principles.

• Some studies⁴ reveal that focus on speed and costs is not sustainable over a period of time. Instead, the priorities should be adaptability and alignment.

Impact of AI on Supply Chain Resilience

For example, the development of AI can be another perspective to consider when thinking about supply chain resilience. The factors in this case vary from:

• Generative AI applied to planning scenarios of demand

to

• Autonomous driving and robots with impact on logistics and warehousing.

Implementation

To implement proactive resilience management:

• Do regular analysis of stakeholders involved
• Update the last PESTEL analysis with new inputs
• Plan scenarios for specific fields of business and geographical regions

Demand Analysis: Understand Customer Needs

An important drawback of the resilience strategies is increased costs (see the “Inventory carrying cost” and other financial metrics). To mitigate this effect, an organization’s next priority is demand analysis.

While it might look like a reincarnation of Lean manufacturing with new risk factors in mind, more accurate demand data and shorter production cycles could help organizations to avoid excessive costs of resilience initiatives.

In the context of strategic planning, demand analysis can be focused on:

• Trends analysis,
• Customer behavior analysis, and
• Demand prediction

Implementation

The general steps to implement demand analysis are similar to the steps of stakeholder management ⁵:

• Identify the type of customer stakeholders involved
• Formulate hypotheses about customer behaviour
• Validate hypotheses by tracking customer value metrics

To validate the success of organization in demand analysis, track:

• Forecast accuracy, %

In the strategy map template, the demand analysis initiatives have the classical project management properties, such as due date, budget, execution progress, etc. The tool can use this information to visualize them on the Gantt chart.

Improving Transparency and Alignment: Strategy Architecture Based on Aligned Scorecards

Strategic alignment is not possible without transparency, which, in a broader sense, means transparency along all value chain⁶:

• Transparency in relationship with internal stakeholders, including procurement logistics, quality, and distribution functions
• Transparency in relationship with external stakeholders, like suppliers, regulators, and customers

The idea of “transparency” varies across the business domains and stakeholders:

• Blockchain⁷  is a promising technology to ensure transparency and accountability across the value chain.
• In the context of this article, we are interested in the transparency required to achieve alignment between functions.

Implementation:

On the practical level, the main challenge is to align a strategy of first-, second- or third- tier suppliers with an overall strategy of organization.

Users of BSC Designer have their strategy architecture based on aligned strategy scorecards. To align suppliers:

• Create dedicated functional scorecards for first-, second-, third- tier suppliers
• Suggest each supplier post required data updates to their functional scorecard
• Align the functional scorecards (by perspectives or by normalized goals) with an overall value chain strategy scorecard

In their turn, suppliers will benefit from understanding the strategy of your organization. With the tool, you can give supplier’s strategists required access rights to your own value chain strategy (or its parts).

Integrating ESG into Supply Chain Function

ESG disclosures is another critical factor⁸ to consider in supply chain strategy. With new sustainability reporting legislation released in Europe and similar legislation coming in the US, some important changes need to be made to how organizations plan strategies.

For example, the European CSRD requires organizations:

• To make strategies more stakeholder-aware
• Disclose relevant contextual information, such as strategies, key activities, risks, performance indicators
• Track the progress of policies implementation, as well as the impact on the environment
• Report on the level of governance, high-level strategy, and functions.

Implementation:

The successful integration of ESG into a supply chain strategy depends on achieving alignment and transparency along the value chain. For that reason, in our strategy map template, the Transparency and ESG goals are connected:

• The lagging performance of the Transparency and Alignment goal contributes as a leading indicator to the ESG integration goal.

Transparency contributes to integration of ESG as leading factor. Source: Supply Chain Strategy.

To track the evolution of compliance achieved over time, we can use the index indicator Compliance along the value chain that quantifies compliance along the value chain.

Talents for Emerging Technologies

A talent shortage in the supply chain field limits the proper implementation of the developed resilience and ESG strategies.

• In the PWC survey, 80% of executives named the lack of digital skills as a challenge of integrating ESG into the supply chain.
• According to the annual industry report by MHI and Deloitte⁹, top supply chain challenges are “Hiring/retaining qualified workers” (57%) and talent shortage (56%).

Implementation:

To formulate the goal of hiring/retaining qualified workers, we can re-use the goals and KPIs from the Talent Strategy scorecard and Diversity & Inclusion Scorecards.

On the practical level, we can copy the indicators between the scorecard, but this won’t be in line with the idea of transparency discussed above. A better approach would be to align mentioned scorecards by creating a live link based on specific indicators or goals.

The talent management scorecard contributes to the supply chain strategy. Source: Supply Chain Strategy.

In our example:

• The Talent Strategy scorecard contributes by leading indicator Widening the potential talent pool from.

The Needs of Internal Stakeholders

The Supply Chain strategy “overlooks” the functional strategies involved in the value chain:

• Procurement
• Warehousing
• Quality assurance and control
• Logistics
• Sustainability

We can align the outputs or key goals of respective strategy scorecards with the stakeholder’s goal of Supply Chain scorecard.

In our example:

• The Warehouse scorecard is contributing by Improve Safety goal, and
• The Procurement scorecard contributes by normalized goal Effective communication with procurement team

Another way to align the scorecards would be to connect them by perspectives, so that the Customer perspectives of Procurement and Warehousing scorecards would contribute to the Customer perspective of Supply Chain scorecard.

There are two more indicators aligned with the goal:

• The Improving Resilience leading indicator shows the effort of the team in improving resilience.
• We track the perception of implemented strategies by internal stakeholders using the Employee satisfaction rate, % indicator.

The Needs of External Stakeholders

The key external stakeholders are the suppliers and regulators. They will be affected by the “drivers” sub-strategies:

• Transparency and alignment
• Integrating ESG into the supply chain function

The leading indicator in the case of suppliers might be:

• Compliance and regulation training, % (see the compliance scorecard for more specific ideas on quantifying compliance.)
• Quality control and assurance training, %

The mentioned indicators can be further detailed according to the four-level model, involving KPIs for the impact on organization’s performance.

The Needs of Customer Stakeholders

The needs of customer stakeholders will vary depending on whether the organization serves businesses or end users.

The basic metrics in this case are:

• Order cycle time calculated as the average time taken to deliver an order once it was received.
• Order fill rate – the percentage of orders fulfilled on time and in full.

Perfect order rate - an index indicator calculated as weighted average of the metrics. Source: Supply Chain Strategy.

On a high-level, we are interested in tracking perfect order rate – an index indicator that includes:

• Orders delivered on time,
• Orders complete,
• Orders damage free,
• Orders with accurate documentation.

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Summary

Supply chain management is a complex field that involves various internal and external stakeholders. One of the success factors of a supply chain’s resilience is transparency and alignment along all value chains.

On a practical level, transparency and strategic alignment between functions can be achieved by linking scorecards by perspectives or normalized goals. These might be strategy and functional scorecards for suppliers, procurement, warehousing, logistics, and quality.

The same strategy architecture prepares the organization’s strategy for implementation of ESG perspective, including the disclosures required by sustainability regulations.

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