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'Measure' what you
want to improve.
Identify KPIs for coordination and effectiveness.
Keep it simple and intuitive.
It is crucial that the measurement of Supply
Chain performance indicators are synchronized with the overall supply
chain strategy. Often the measurement of performance indictors begins
at a functional level and with the formation of supply chain these do
not change much. The organizations continue to measure the same old performance
indicators while implement the new initiatives in the supply chain for
better coordination. A number of early supply chain adopters have recently
been left bewildered by their failure to demonstrate what they have achieved.
The explanation may lie in the failure of these companies to measure what
they ought to measure.
Supply chain performance indicators are
classified in two clearly defined but closely interrelated categories
- functional indicators and end-to-end supply chain indicators.
One measures the effectiveness of the function and second measures how
well these functions are coordinated. While they are measured separately,
they must not be considered in isolation. The choice of functional indicators
depends upon industry vertical. Traditionally organizations measure functional
indicators and hence have a good understanding of them. With the advent
of supply chain and focus on overall coordination and effectiveness, some
of the functional indicators come out to be conflicting and counter productive.
These need to be removed e.g. a company trying to improve its customer
service cannot have 'reduction in machine change overs' as an indicator.
The end-to-end measures are more generic
in nature and can be classified in 3 sub-categories:
Assets related
- Cash to Cash Cycle time: Inventory days
of Supply + Days of Sales outstanding - average payment period for materials
(time it takes for a dollar to flow back into a company after it has
been spent for raw materials)
- Inventory days of Supply: Total gross
value of inventory at standard cost before reserves for excess and obsolescence
divided by COGS and multiplied by 365 days
- Asset turns: Total Net product revenue
divided by Total net assets
Costs related
- Cost of Goods Sold: The cost related
with buying raw materials and producing finished goods. This cost includes
direct costs (labor, materials) and indirect costs (overhead)
- Supply Chain Management cost: The costs
associated with the supply chain including execution, administration
and planning
- Value added productivity: Total product
revenue less material purchases divided by total employment in full
time equivalents
- Warranty cost: Warranty costs include
materials, labor and problem diagnosis for product defect
Customer Service related
- Fill rates: The percentage of ship from
dock orders shipped within 24 hours of order receipt. For services,
this metric is the proportion for services that are filled so that the
service is completed within 24 hours
- Perfect Order fulfillment: The percentage
of orders that are delivered complete, on time, with complete documentation
and in perfect condition
- Delivery performance to Customer commit date:
The percentage of orders that are fulfilled on or before the original
scheduled or committed date
- Responsiveness lead-time: The average
elapsed time, including all delays, to receive a customer order and
transform resources into goods and services, through to the point of
customer receipt. (assuming zero inventories in the system)
- Production flexibility: Number of days
required to achieve an unplanned sustainable 20% increase in deliveries
Some key take-aways
- Know what to measure and what targets to set as critical first steps
in improving SC performance
- Learn the balanced approach to measuring Total Supply Chain performance
for recognition and reporting on results
- Identify what and how to appraise and sell top management on the value
proposition from implementing SC improvement initiative
©
2000-10 DecisionCraft Inc.
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