Manufacturing is the backbone to most of what we take for granted. But as anyone working in the manufacturing industry knows, there is a lot of work that goes into ensuring everything goes smoothly.
Managing all the moving parts in your supply chain can be a logistical nightmare unless you have access to the right KPIs and metrics. You need to track the current status of shipments, monitor inventory levels and ensure that all orders you ship are completely accurate. Use these supply chain KPIs and metrics to ensure that your operations are always running smoothly.
The value of Supply Chain metrics depends on your Supply Chain objectives and how they support your business strategy.
If we define the Supply Chain as the core set of processes that link suppliers to customers via the value-adding manufacturing process, then the objectives are clear. At the highest level, the Supply Chain must contribute to increasing shareholder value by making the business more competitive and more profitable within the context of your business model. The challenge is to find the most important metrics that reflect what the supply chain must do to support those objectives.
A first step is to break down pertinent supply chain metrics into groups:
Supply Chain Performance – Demand forecast accuracy, replenishment lead time and variability, supplier performance, etc.
Customer Service – service levels, order fill rates, on-time delivery, etc.
Supply Chain Leverage – inventory cost, manufacturing cost, material cost, DSO, DPO, etc.
Each metric group has a different level of detail associated with it depending on the business function and level in the execution hierarchy where the metrics will be used.
Metrics supporting Supply Chain Performance strive to improve demand visibility through improved demand forecast accuracy (DFA). Driving continuous improvement in DFA at the lowest level in most make-to-stock companies will create enormous leverage downstream in the supply chain.
Supply chain metrics supporting Customer Service strive to balance service levels against customer profitability. While providing 99% fill rates is admirable, it may be too costly for some classes of customers and the products they buy.
Metrics supporting Supply Chain Leverage strive to reduce the cash-to-cash conversion cycle time (including days of inventory) while maintaining targeted customer service levels. In a competitive market, supply chain flexibility improvements are key and needed to support the innovation cycle of the business.
Supply chain metrics are an important tool for measuring progress against goals, and benchmarking is an excellent way to establish the goals for improvement programs. As an example, the Supply Chain Leverage of several world-class companies has set the bar quite high.
Source: Company reports
Dell, one of the most efficient supply chains in the world, with DSO less than half of DPO, is able to use their supplier’s cash to generate profit and shareholder value. Wal-Mart, while in a different industry, has much more efficient operations than their upscale competitor, Target.
Best-in-class companies have a balanced set of performance metrics that stretch from top to bottom of the business, carefully linked from level to level in successive degrees of detail. Many of these same companies have compensation and incentives tied to their performance metrics for truly driving continuous change.
As the saying goes, if you can’t measure it … you can’t manage it, and tools like Silvon Stratum establish the base for building highly customizable metrics-based business management systems.
First, the metrics discussed here are for manufacturers, retailers, and distributors. This is important and why they are THE supply chain metrics.
Metrics are a way to measure performance; and, in turn, communicate that information to key executives in the company. Their value is how supply chain management is supporting the direction and strategy of the business. It is important that they present a strategic and tactical understanding of what is happening and how well it is happening.
Supply chain management is a process that flows across the organization and from suppliers through to customers or stores. The challenge of a supply chain is the length; scope; geographic reach; number of internal and external stakeholders and participants; and overall complexity. No other activity has all this—suppliers and factories around the world and global customers.
Supply chains are non-linear, not linear as some project them. There are supply chains within supply chains. Viewing non-linear supply chains as linear contributes to performance issues and to measuring operations.
All these make it difficult to select the proper metrics. There are numerous metrics. Good metrics should measure the performance of the total supply chain, more exactly the process.
KPIs (key performance indicators) must be measurable. As a result, numerous metrics are about the logistics components. Some of these are good. However, they do not present a view of the total supply chain. Plus, many have little or no usefulness for the C-suite. Assessing logistics parts is a node-link approach and does not recognize the supply chain process.
Supply chain management is a process that is often measured on its logistics costs. That approach is a root cause of issues. Such computations do not measure the supply chain or its performance and can include factors outside of the supply chain. In addition, the way accounting treats supply chain costs is dated. They go back a hundred years, before supply chain management and global activity were recognized.
Supply chains are being transformed. The Amazon Effect has stimulated the beginning of a global supply chain revolution. It is moving beyond e-commerce/B2C and is crossing industries and markets.
Traditional supply chains for retailers and manufacturers face issues with omnichannel, its different markets, and new ways to reach customers, including end-user ones. The underlying expectations are pushing supply chain transformation. In turn, this means improved performance and new metrics.
Supply chain complexity raises the question of whether measuring the overall supply chain is sufficient. Segmenting can reflect similar supply chain characteristics, business unit, or other ways. Supplementing the macro performance with segmented KPIs provides understanding and insight to what is happening on both centralize and “decentralized” views. It enables seeing underlying factors to the “corporate” measure.
Another topic is how many metrics to have. Too few supports the view of a monolithic, linear supply chain. Too many metrics can become measures for measures sake.
The best four metrics that define supply chain performance are:
(1) Inventory Velocity. Inventory has been a hot button with dual challenge of capital tied up and while being able to service sales orders. With omnichannel and meeting customer expectations, it has become hotter. Aligning inventory and the supply chain network is an additional challenge. Moving inventory more quickly through the supply chain has become a requirement. This is also important with inventory planning and with being able to respond to positioning products.
This is also a good metric for tactical issues, such as the working capital mandate.
It is important for lean and the waste of excess inventory. In many of these cases, inventory is stationary, not moving dynamically across the supply chain. Speed increases the value of inventory, while reducing working capital. It is critical with aligning networks, positioning inventory, and satisfying customer requirements.
Inventory control is outdated in a business world defined by speed—from decision making to customer expectations. Supply chain management is pivotal in achieving the many forms of velocity. Also, inventory management, as traditionally understood, has been replaced by alignment and by velocity.
Velocity can be measure as turns or days of inventory. It can be applied to finished goods; WIP (work in process), especially that is transferred to another location; and raw materials. Segmenting as to division, product category, or other relevant ways for the company is important.
(2) Time Compression. This KPI ties to inventory velocity and is an integral part of the providing the immediacy customers want. Time is a hidden waste both inside and outside the company and is an enemy of supply chains. Reducing it is important with the new business reality.
Measuring time and compressing it must be done across the total supply chain—from suppliers through to customers (and/or stores). This means breaking it down by inbound, outbound, and stationery—sitting in distribution centers and factories.
Remember, time is important with building inventory velocity and minimizing inventory waste. There are two points here. One is that the largest time sector is with the inbound supply chain, especially if there is international sourcing. The other, and often overlooked, is the non-movement part. That is a fixed block of time that is not compressed, unless it is recognized.
(3) Perfect Order—Customer. This is an outstanding metric. The KPI comes from the SCOR (Supply Chain Operations Reference) model. This metric is about the customer. It validates the customer mantra. This is what customer service is—delivery of orders, complete, accurate, and on time. It is implicit in a customer’s doing business with a company. But, as simple as that sounds, firms struggle with it.
The new reality of selling for manufacturers and retailers is the customer experience and meeting customer requirements. Service expectations have been elevated. It is not limited to B2C and is spreading across industries, markets, and B2B. Omnichannel is everywhere. Speed is expected. That makes this metric vital.
(4) Perfect Order—Supplier. The supplier is at the opposite end of the supply chain from the customer and the perfect customer order. This metric then creates a yin and yang. Supplier performance—purchase orders delivered complete, accurate, and on time—is very important to supply chain success.
This is a fundamental metric. Supply chain performance begins on the inbound side with suppliers. The impact of weak supplier accomplishment ripples throughout the supply chain and impacts the actuality and fundamentals, both operational and financial, of the company.
The four metrics triumph because they recognize and deal with the entire supply chain and its process. Success with them can mitigate company failures and problems with sales, growth, and profitability. The four metrics have value across markets, industries, and businesses. They are inter-related, connected, and bring cohesion to the supply chain, what it does, and how it does it. These define it and provide a way to see the intricacies and convolutions which can be lost in the daily happenings. They recognize what can be viewed as unrelated parts of the supply chain—when they are not.
The four metrics triumph because they recognize and deal with the entire supply chain and its process.
For example, the two perfect order measures highlight the supply chain. Add the time compression and inventory velocity that recognize the speed which has become a requirement of business. This is especially true for retailers and manufacturers dealing with duality of omnichannel and its selling to intermediaries, directly to end-use customers at their designated locations, and through ways that has customers coming to merchandise. The traditional ways no longer function as they once did.
The challenge to improving performance is ongoing. Success lies at the macro and granular levels. Some of the work ahead includes:
- Focus and improve the process
- Increase visibility across the supply chain
- Integrate the financial supply chain with the product supply chain.
- Align the inventory network
- Extend the supply chain upstream
- Implement advanced integration of process and technology
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Tom Craig
Tom is a supply chain and logistics consultant with LTD Management. He has real-world logistics and supply chain experience. Tom's experience and capabilities are cutting-edge and bring authority to clients. Domestic and global. Blue ocean strategy using SCM. New supply chain that drives new e-commerce. Multichannel. Inventory velocity / reduction. Lean. Best practices. Risk assessment. Segmentation. Metrics. Process. Technology. Outsourcing. Suppliers. Supply chain complexity. Product portfolios. Brand and private labels. Short shelf life cycles. Customer portfolios. Transport. Inventory. And more. Also provides consulting for 3PLs and other logistics service providers. Develop and execute strategy, create value proposition/unique selling proposition, positioning, blue ocean strategy, and service / market segmentation that improve customer retentions, increase margins, and grow the business.