The Impact of the Index by Matt Gersper and Marisa Brown

Imagine that your organization has the ability to precisely measure performance in major handoffs within your international supply chain. How many orders would you expect to see processed seamlessly through each handoff? The answer may be significantly fewer than you think.

Imagine that once a purchase order is created, your systems can track the frequency with which:

1. the supplier filled your order on time and complete,
2. the foreign in-land transportation delivered the goods to the foreign port on time,
3. the goods cleared the foreign customs process with no delays,
4. the international transportation delivered the goods to the domestic report on time,
5. the goods cleared domestic customs with no delays,
6. the domestic in-land transportation delivered the goods to your warehouse on time,
7. the order was received complete and damage-free, and
8. all customs declarations were complete and accurate (no post-entry consequences).

Further, imagine that your company-wide performance across all eight of these major supply chain activities averaged 80 percent—in other words, 80 percent of the time, the activity was completed on time and according to expectations set by your company. Though 80 percent may seem acceptable, the result of this level of performance across 10,000 transactions would be only 1,678 transactions completed according to your expectations. The remaining 8,322 would incur one or more problems, slowing the transaction and shrinking your bottom line with unintended costs.

How does 80 percent on time and complete become just 16.78 percent? The answer lies in the Supply Chain Performance Index. The cumulative effect of error rates is illustrated by the following formula:

80% * 80% * 80% * 80% * 80% * 80% * 80% * 80% = 16.78%

Unfortunately, real-world error rates can be much greater than 20 percent: A June 2007 article by Global Economy magazine reports that “in the first quarter of 2007, only 47% of container vessels globally arrived at the ports on time, the lowest level on record.”

When we insert this data into the index we just discussed, the level of performance across 10,000 transactions drops to just 9.65 percent on time and complete. More than 90 percent or 9,000 shipments would be hampered by a problem or problems at one or more handoff points:

80% * 80% * 80% * 47% * 80% * 80% * 80% * 80% = 9.65%

What could possibly cause such poor performance? As can be expected, the problem lies in the global nature of the process: Each stakeholder is acting independently, with incomplete information. Their decisions are motivated by self-interest because they cannot see (and therefore cannot make) their decisions in the context of a global process. Adding to this fundamental problem of perspective are other communication failures: cultural differences, industry jargon, lack of importer-set standards and expectations, etc. Inefficient supply chains cost corporations millions of dollars in hidden costs, severely impacting company profits.

The Future of Measurement
Financial opportunity abounds for international supply chains that effectively manage the proliferation of Free Trade Agreements, improve sourcing options, and implement new supply chain finance programs for international suppliers. In CFO’s Agenda for Global Trade Benchmark Report, Beth Enslow of AberdeenGroup concludes, “A $1 billion company can free $10 million to $40 million in cash by better controlling its basic global trade processes.” GDM recently collaborated with Enslow, a leading industry analyst, on an extensive data mining project for the International Compliance Professionals Association (ICPA). The project examined the operations of five Fortune 500 companies and identified more than $500 million in potential savings. How large is the opportunity for your company?

To learn more about global trade benchmarking, contact Matt Gersper of Global Data Mining or Marisa Brown of APQC.