In this era of data analytics, almost all decisions are the result of a digital solution of some sort. The same goes for supply chain management, a function that has embraced many levels and types of technology necessary to analyze and choreograph the global shipment of parts and products.
Pivot tables and regression analysis can only take you so far. There are efforts in supply chain management that defy analytics and objective data. How do we calculate the importance of strong supplier relationships, not the ERP calculated kind, but the face-to-face variety? How about the return on investment of a supplier day, sustainability efforts, staff education or other projects that don’t easily lend themselves to standard return on investment calculations?
Measure twice; cut once
Formal quality training teaches us that anything that cannot be measured is considered subjective and anecdotal.
Objective measures in quality, such as a product’s size, operating performance or other functional attributes must be clearly defined and have the ability to be measured with properly calibrated equipment and with properly vetted procedures.
For example, using a light meter, an inspector can test for the amount of lumens produced by an LED fixture. Only the indicated tolerance stands in the way of the passing or failure of a part, assembly or product. A go-no-go gauge, a common inspection device, is both a tool and a quality assurance philosophy.
A company’s quality manual, setting expectations and process, is a sacred tome in any viable manufacturing company. Yet, down the hall, there are others huddled in a supportive yet alternative function that looks at performance through another set of tools. For finance professionals, return on investment (ROI) is the measurement of choice when judging the efficacy of a project.
While accountants and quality managers live comfortably in a black or white environment, supply chain folks have set up quarters in the infamous gray area.
Supply Chain Dive
ROI looks at the relationship, or ratio, between the cost of an investment and its return. With a high ROI, the return on the investment far outweighed its cost, and making the investment was a profitable decision. With low ROI, profits may not have been as good as expected. And of course there are situations with negative ROI where the cost of the project exceeded its return.
Calculating this ROI is done objectively through normal and customary calculations. For example, does the investment in robotic handling equipment in a warehouse result in an increase of shipments and a reduction in labor costs? Over time this can be objectively calculated with statistics easily available to the company.
Supply chain management professionals have increasingly depended on objective criteria when measuring supplier performance. Typical system generated statistics include on-time delivery, quality and cost:
- On-time delivery calculations can be made when considering the suppliers committed delivery date and the actual delivery date.
- Quality performance can be determined by calculating incoming failure rates.
- Cost can be calculated against last cost or a standard cost established by the company.
In all cases, these are objective criteria that can be measured and calculated, allowing for performance measures for the supplier and the buyer alike.
The Twilight Zone
In a process driven organization, statistical measures like this are comforting and efficient.
But danger lurks just around the corner. Just how do you measure the ROI on something subjective? What if standard measures of performance just don’t fit? While accountants and quality managers live comfortably in a black or white environment, supply chain folks have set up quarters in the infamous gray area when dealing with the supplier community. We use judgment more often than other functions in our companies.
We’ve all dealt with suppliers who have outperformed their performance statistics. We depend on our suppliers to go the extra yard in meeting our occasionally onerous requirements. But sometimes that effort is not reflected on their data driven fitness reports. There is a divide between their statistical value and their intrinsic value. Let’s call that the judgment and value area. That’s where we live.
Supply chain's value proposition
In this gray zone, we encounter questions without definitive, black and white answers. What is the ROI of asking all of the supply chain professionals to get professional certification in their field? The assumption would be that certification will lead to increased performance, but there is no data linking the two.
What is the ROI of a supplier award process that recognizes excellent supplier performance? Again, the assumption is that suppliers would be motivated to win the award, but does that motivation lead to improved performance?
Judgment and value enter into the larger picture. Not every project or initiative can have a standard ROI, but there can be a subjective ROI. Intuitively we know there is a collective return on investment that will benefit the company.
Some things, such as working with suppliers who don’t pollute are innately just the right business decisions no matter their on time delivery performance. While companies might not have an official policy in this regard, buyers are gaining confidence to increasingly make these ethical sourcing decisions.
Let’s calculate the ROI of doing the right things.
Supply Chain Dive
The same goes for working with HUB (historically underutilized business) suppliers. Community impact and support are socially responsible efforts that companies need to do. Let’s calculate the ROI of doing the right things.
This leads us back to value and judgment of supply chain professionals. Trust us to do what’s best for the company and the supply community. Sourcing, negotiation, risk mitigation supplier relationships and problem solving are critical judgmental decisions we need to make every day.
We just know intuitively that a more educated staff will do a better job, supplier recognition is important and working with underutilized suppliers in the community is just the right thing to do. Return on investment for supply chain management might just need an additional definition, albeit one that calculates value and judgment.
How about return on integrity?