The Performance Measurement Group (PMG), a subsidiary of high-tech management consultants PRTM, is conducting a two-year supply chain management benchmarking series. This article presents key findings from the first two surveys in the series:

Overall Business Performance and Deliver (from the Plan, Source, Make, and Deliver nomenclature of the Supply Chain Council's SCOR model).¹

Our first survey of overall performance at 110 organizations in five major manufacturing sectors demonstrates that, while companies are driving to become more flexible, they are doing so without the added expense of idle inventory or runaway capital investments. The emphasis now is on balance in all aspects of the supply chain and financial accountability. Leaders are driving further gains by Web-enabling their supply chains to become even better than the best in class—what we call "eClass."²

The top performers conduct ongoing initiatives to squeeze costs, improve speed and flexibility, and maintain reliability. Among the other traits of the leaders are these:

• They are achieving breakthroughs in responsiveness. Best-in-class upside production flexibility results have improved by 65 percent since 1995. Results show that labor and internal manufacturing are no longer significant constraints; the real limit is material availability.
• Leading companies are achieving breakthroughs in efficiency. Best-in-class performance in total supply chain management costs is 27 percent below 1995 levels; cash-to-cash cycle time has dropped by 18 percent.
• The leaders are achieving breakthroughs in speed, flexibility, and efficiency while still maintaining reliability. Delivery performance has remained essentially unchanged since 1995.
• They are using the Web to fundamentally alter the nature of communications among trading partners. Over the next two years, the value of orders placed via the Web in the high-tech industry segments is expected to increase sixfold.
• Leading companies understand that eClass is about more than e-tail. It's about leveraging the Web throughout the supply chain. Seventy-five percent of Internet exchanges are unrelated to order placement. The Web is being used to transmit other information, such as shipment status, order status, and inventory status.
• Leading companies understand that eClass will lead to new performance standards and are moving beyond on-time delivery as the definition of reliability. Best-in-class performance in perfect order fulfillment has improved 5 percent since the mid-1990s, as industry moves to a holistic view of complete, on-time, and accurate order fulfillment.

Our business performance survey focuses on the "Level 1" metrics from the SCOR model. These include such key areas as delivery performance, order fulfillment, production flexibility, and cash-to-cycle time, among others.

The results of these process-performance measures have wide-ranging strategic significance when organizations use them to compare their performance against that of their peers. Leaders in supply chain flexibility and responsiveness, for example, are threatening to create a strategic gulf between themselves and their competitors based on an ability to achieve superior and recognizably better service levels at competitive prices. Our research shows that best-in-class performance continuously improves year after year. This means that companies whose performance lags behind that of the top performers may find that the gap will increase going forward.

In this survey, PMG examines best-in-class industry performance of customer-facing measures and internal-facing measures in supply chain management. Customer-facing measures, such as upside production flexibility and delivery performance to request, quantify how well a supply chain delivers products to customers. Internal-facing measures, which include total supply chain management cost and cash-to-cash cycle time, portray how efficiently a supply chain operates. Put another way, these measures reveal how effectively an organization uses resources in creating value for the customer. (Our business performance database also includes input from companies that participated in supply chain management surveys conducted in 1995, 1996, and 1997.)

In the Deliver survey, PMG explored in detail the customer-facing side of the supply chain, with a particular emphasis on adoption of Internet-based technologies.

The results of the Overall Business Performance survey show that manufacturers are more accurately adjusting forecasts and production cycles to respond to rapid changes in demand. The following is an analysis of the specific metrics that have particular relevance to supply chain management.

Total Supply Chain Management Costs: The total cost to manage order processing, acquire materials, manage inventory, and manage supply chain finance, planning, and management information systems.

The survey found that leading companies had cut their total supply chain management costs to between 4 and 5 percent of sales. They now spend 5 to 6 percent less on supply chain management as a percentage of sales than median performers. The difference in this performance means that a best-in-class company with $500 million in annual sales has a $25 million to $30 million cost advantage every year.

According to PMG's historical data, companies today are achieving breakthroughs in efficiency. As noted in the introduction, best-in-class performance in total supply chain management costs is 27 percent below 1995 levels. Before 1996, total supply chain management costs for best-in-class companies were between 6 and 7 percent of revenues. We attribute this relatively higher cost level to a dislocation taking place at the time across industries. Specifically, companies were implementing enterprise resource planning (ERP) and advance-planning systems in conjunction with process change.

Improvements in this particular cost area can be the path to overall best-in-class performance, providing a source of funds to finance initiatives throughout the supply chain or other areas of the organization. Asset utilization in a company with strong supply chain management performance is likely to be 60 to 100 percent better than the median, freeing up cash to use on investment opportunities or to reduce debt.

An illustration of a benchmarking-based initiative with supply chain cost implications can be seen in the following example: The management team of a large manufacturer used benchmarking as the basis for an integrated improvement effort to confirm that its inventory investments were higher than average and total supply chain response time was twice as long as best-in-class time. Through business process redesign, they were able to close the gaps and see a 15-percent improvement in on-time delivery performance and a 60-percent improvement in total supply-chain response time.

Key to this company's success was the leadership demonstrated by the executive team in defining what needed to change, empowering the improvement teams to implement the changes, and restructuring the incentive system so that the entire business pursued year-over-year improvement. The company has exceeded best-in-class performance through focused supply chain integration. It continues to benchmark performance and apply best practices as part of an iterative process.

Cash-to-Cash Cycle Time: The number of days between paying for raw materials and getting paid for product, as calculated by inventory days of supply plus days of sales outstanding minus average payment period for material.

Our research shows that best-in-class performers now operate with less than 40 days of inventory throughout the supply chain. However, an even more comprehensive and meaningful metric is cash-to-cash cycle time, as defined above. This measure shows the impact of reduced inventories on velocity of cash moving through the company. Best-in-class companies reduced cash-to-cash cycle time by 18 percent between 1995 and 1998. The cycle time for these top performers now is less than 30 days. For median performers, it can be up to 100 days.

If companies want to be best in class, they must strive to reduce cash-to-cash cycle time to less than a month. The implication here is that companies need to pay their suppliers quickly, collect from their customers just as quickly, and move inventory continuously. Achieving this level of performance requires both paying superior attention to customer service and creating a "win-win" relationship with suppliers.

A traditional "stovepipe" approach to improving cash-to-cash performance has been to stretch payables. In today's world of collaboration, however, that is no longer a viable tactic. Suppliers hardly ever view "slow payers" as strategic partners. Supply chain integration and electronic payments require a close working relationship among all parties. It now is in everybody's best interest to keep payables down. Suppliers act less flexibly with companies that pay slowly. Slow payers have the disadvantage of taking on more inventory or having longer order-fulfillment leadtime than companies that pay promptly. Similar dynamics are at work on the customer side. If your customer really wants you to be a supply chain partner, that customer will pay you within a reasonable period.

Best-in-class performance requires a balance between payables and receivables, leaving inventory turnover as the point of leverage.

Upside Production Flexibility: The number of days required to achieve an unplanned, sustainable 20-percent increase in production.

Upside production flexibility is another measure of supply chain effectiveness. Best-in-class performance in this metric now has dipped below two weeks—and in some industries under a week. PMG's data reveal an interesting development: Best-in-class flexibility for labor and internal manufacturing capacity typically is zero days. Clearly, labor and internal manufacturing no longer represent significant limitations for manufacturers. The remaining constraint now is material availability.

It's natural to focus on cost reduction and high asset utilization. But achieving those goals can limit upside production flexibility. Production flexibility often is overlooked because it is no one's responsibility until an unexpected demand spike occurs. Well-managed companies design supply chains capable of rapidly identifying and removing material, labor, and capacity constraints, while still achieving financial targets. A key issue confronting managers is how to continue to reduce material constraints without increasing on-hand inventory. Best-in-class companies are working to streamline pipelines with their suppliers and their suppliers' suppliers while synchronizing operations across the supply chain to reduce ramp time, cost, and uncertainty. Executives need to move away from the 1970s manufacturing mindset of rewarding operations management solely on running plants or mills at 90-plus percent capacity. Instead, they should take a more balanced approach that rewards management for achieving flexibility.

Benchmarking data can be used to address production-related issues effectively, as the case example described below shows.

A manufacturing site facing closure because its performance was lower than average compared with that of other facilities within the organization embarked on a rapid turnaround program. The effort was led by PRTM, using PMG benchmarking data to support a "fact-based" improvement approach. An initial benchmarking analysis showed that capacity and yield were well below average industry performance. Working with plant management, the improvement team reviewed sourcing and manufacturing production processes and recommended improvements to meet aggressive goals needed in a short time. Within one business quarter, the operation had increased capacity by well over 50 percent. The improved line operation eliminated nearly a dozen operators per shift as well as weekend overtime necessary for spike orders. Yields also increased by over 15 percent. Total savings were estimated at nearly $5 million annually for this one operation.

Plans are in place to reduce the make-cycle time and work-in-process inventory even further for this manufacturer. Now that the operation is achieving above-average industry performance, plant management has set a goal previously thought unattainable: Achieve best-in-class performance in key supply chain metrics within a year.

Delivery Performance to Request: The percentage of orders that are fulfilled on or before the customer's requested date.

Other results from the survey indicate that companies operating at the best-in-class level of delivery performance are meeting the customer request date at least 94 percent of the time. In some industries, best-in-class delivery performance to request (DPTR) approaches 100 percent. The median performance levels range between 69 percent and 81 percent. Best-in-class DPTR levels have remained essentially unchanged since 1995.

Setting a goal of 95-percent delivery performance to request is important but even more needs to be done. Over the past decade, companies have made huge strides in reducing available days of supply and finished-goods inventory. They now must focus on more flexible processes and reliable execution. This will allow them to adjust to specific changes in orders and still meet high DPTR performance targets.

Surprisingly, a large number of companies do not track performance against customer request date. And many track performance against their commitment to customers, rather than the customer's actual request. Yet the most fundamental measure of customer satisfaction is the frequency with which companies can meet request dates. This measure shows how well a supply chain is configured to meet customer expectations, which is a key indicator of agility. Since you can't manage what you can't measure, sales and operations teams should implement simple and reportable delivery performance in their ERP or order-management systems.

Those companies that already do track and report this metric should raise the bar and take the next step by incorporating delivery performance's richer cousin, perfect order fulfillment. Best-in-class performance in perfect order fulfillment has improved 5 percent since the mid-1990s, as industry broadens its perspective beyond simple delivery reliability to a more holistic view of complete, on-time, and accurate order fulfillment.

The strategic implications of developing competencies in the areas measured in our surveys should be clearly understood. Supply chain competencies provide points of leverage that should lead to a more dominate position in the marketplace. And market leadership, in turn, translates to profit advantage. Our surveys consistently show a strong statistical correlation between market leadership and significant financial benefit. The market leaders in fact, earn 75 percent higher profits than the median companies.

Importantly, supply chain initiatives should link to the company's overall direction and should be constructed to confer competitive advantage. Your supply chain management strategy should align with and support your competitive differentiation strategy. If your market analysis suggests that a customer-centered strategy offers the greatest opportunity, the supply chain initiatives should be aligned accordingly to support this approach. In this case, emphasis needs to be placed on the customer-facing metrics providing the most leverage in your markets. Product-centered approaches, by comparison, tend to place a higher emphasis on flexibility and response times to accommodate shifts in the marketplace.

The data clearly indicate some obvious, but important, relationships:

• Companies emphasizing reliability over other factors are much more likely to deliver on time to customer request.
• Companies emphasizing flexibility over other factors are better able to ramp labor and internal capacity in response to unforecast demand.

And with any strategy pursued, remember that commitment is everything. Achieving best-in-class performance results from management focus.

Our delivery survey in the benchmarking series revealed a number of interesting findings with regard to Internet usage in supply chain management. Here are the highlights:

• In 1998, 2 percent of the orders placed in most industry segments were made on the Web. By the end of 2000, our survey respondents anticipate booking 12 percent of orders over the Internet. These projections reinforce the common perception that e-business is growing rapidly and has become an important business channel within a total supply chain portfolio.
• Combined, all electronic inflows of orders are expected to grow from 27 percent to 42 percent of orders placed from 1998 to 2000. This marks an increase of 50 percent in two years. Companies are investing heavily in developing electronic order-receipt mechanisms. This has far-reaching implications for the entire administrative front end of the order-fulfillment process.
• e-Business orders are replacing face-to-face sales calls, phone, fax, mail, and e-mail. The percentage of orders placed using these more traditional methods is expected to drop from 65 percent to 50 percent. This significant level of reduction should have a continued dramatic impact on order-management staffing—and consequently on order-management costs. Based largely on past experiences with EDI, most companies understand the cost/benefit of electronic transmission of orders. However, most don't yet fully comprehend the impact of improved data integrity associated with the expected sixfold booking increase on perfect order fulfillment and invoice accuracy.
• Although automated techniques are growing at a rapid rate, our survey indicates that fully half of all orders placed still require manual order entry. Significant improvement opportunities remain for all companies in simplifying the order management process, properly applying information technology, and continuing to meet the customer's needs.

Today's customer relationships require a great deal of data transfer between companies. Customers frequently request shipment-status notifications and inventory-status updates. In addition, suppliers and customers often exchange product sales-activity data as well as forecasting data.

We find that these simple data exchanges or inquiries make up most of the business-to-business activity now taking place over the Web (contrary to the popular impression of the dot-com revolution, in which every order is only a "click" away). The Internet has adapted quickly to provide information exchange and preliminary and pre-order communication between the customer and the supplier.

Throughout the customer-facing side of the supply chain, we are seeing the development and deployment of tactical sophistication. The leaders are blending practices and technology to further the vision of the supply chain beyond a "chain of chains" to a "Web of chains."

The concept of best in class is now moving to what we term "eClass"—exemplified by companies that understand the rules of e-business and are aggressively implementing the leading practices and technology. We expect to see a related impact on performance metrics. Units of measure in metrics like order-fulfillment leadtime will move from weeks to days, and from days to hours as eClass companies raise the performance bar for everyone.

Authors' Note: For executive summaries of PMG's Overall Business Performance and Deliver surveys or for more information about becoming a subscriber and participant in the survey process, contact Steve Geary at sgeary@prtm.com., or visit the firm's Web site at www.pmgbenchmarking.com.

Best Practice: Implement order tracking systems that can compare requested vs. actual dates at the line-item level. These systems can be used to give customers better visibility of inbound orders, often as an e-commerce service.