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The Gap Analysis
The agenda for Day Two is focused on completing the SCORcard gap analysis. The first step is to calculate the mathematical opportunity for each metric. This is done by calculating both the parity gap and the competitive requirement gap, and then subtracting actual performance for each metric from the benchmark number determined by the competitive requirement for the category.If the gap analysis results in a negative number, it means actual performance is less than the benchmark (for example, the gap between an actual delivery performance of 78 percent and competitive requirements of 92 percent is 14 percent). The next step is to translate each gap number into a profit potential; the most frequently used measure is operating income.The calculations are straightforward for the internal metrics but can be subjective for customer-facing metrics. The basic calculation that the design team, and ultimately the business team, must agree upon is the anticipated effect on operating income of improvements in delivery performance, responsiveness, and flexibility. This is often more art than science, but there are some accepted approaches:The Lost Opportunity Measure. This calculates the revenue lost before order-entry due to lack of availability of a product.
The Canceled Order Measure. This measure calculates revenue lost after order-entry, due to canceled orders that result from poor delivery performance.
The Market Share Measure. This attempts to project a revenue increase based on achieving competitive advantage in the customer-facing metric categories.
Because any approach will have its tradeoffs, just make sure to document your assumptions and details for the financial analysis, and identify some of the steering team or business team members to help validate preliminary numbers.In Fowlers' case, the design team agreed on the organization of the gap analysis itself, deciding that all the opportunity dollars should be calculated using an operating income profit perspective that allowed them to add up the numbers in the "opportunity" column of the SCORcard. Here are some other decisions made by the team:
Group all delivery reliability metrics, and use "lost opportunity" and "canceled order" calculation methods. The detailed calculation required an estimated revenue increase multiplied by the gross margin, resulting in an operating income opportunity.
Use opportunities in the supply chain responsiveness and flexibility category to improve results in reliability and cash-to-cash. This minimized the risk of double counting.
Group the supply chain cost category, and base the opportunity calculation on the total supply chain cost and warranty/returns processing cost metrics.
Base the supply chain asset management efficiency category on the cash-to-cash metric. Because this data was only available at the enterprise level, the calculation first multiplied the enterprise working capital times the cost of capital, and then multiplied it by the percent of total revenue for each product group.
Use the number in the profitability section as the sum total of the operating income improvements on the SCORcard.
Here are the assumptions made for the food and technology product group gap analysis (Tables 6-2 and 6-3):
Food products delivery reliability assumed a one percent increase in revenue due to availability of product at the point of order using a 14 percent gross margin. The 1 percent was based on analysis of lost and cancelled orders, conducted by the customer service department over the course of one week.
Using the same study, the technology products group assumed a 1.5 percent increase in revenue using a 13 percent gross margin.
Total supply chain cost was based on the cost centers allocated to material acquisition, order management, MIS cost, planning, finance and administration, and inventory carrying cost. Inventory carrying cost and warranty/returns processing cost were eliminated from the opportunity column to avoid double counting.
Warranty/returns processing cost was based on the cost centers to support return transactions, warehouse storage, and transportation.
With a total enterprise working capital of $514 million and a cost of capital at Fowlers of 10 percent, the economic profit potential for Fowlers is $51.4 million. This number was allocated to food products at 25 percent and technology products at 45 percent representing their share of total Fowlers revenue.The team's homework for the next week was to identify steering team and extended team members to validate the calculations and, more important, the detailed assumptions behind the numbers. The second part of the homework required some thoughtful analysis of putting together the rational business case for supply chain improvement for steering team review number two.
