Measuring effective performance in the supply chain

Charts and tables show business operations performance

Establishing performance metrics have become the norm in most supply chains so much so that sometimes there are too many of them or they are simply not relevant. Supply chain executives sometimes fall into the trap of setting up measures for the sake of measuring their subordinates’ accountabilities or as a knee-jerk response to problems.

For instance, some large firms I’ve worked with would set performance measures for line efficiency for manufacturing, vendor lead time for purchasing, and shipment speed for logistics. Data presented from the performance measures would come out excellent to the extent they were in the realm of ‘world-class.’

When it came to the companies’ customers, however, the story would be much different. Customers would feedback that orders were being delivered late and often incomplete. Sometimes within the company itself, financial and marketing execs would gripe that inventories were too high or finished products were not available in stores in some areas of the country.

Whatever performance measures a firm’s supply chain adopts, it should be consistent with those of the firm’s customers. Otherwise, the measures wouldn’t be effective.

Any supply chain metric cannot stand alone like an island. It has to be linked with others towards a common purpose.

How does one define what supply chain metrics to use? As supply chain metrics should be consistent with a firm’s overall goals, they would have to be aligned with the expectations of top management. For instance, supply chain metrics should align with financial targets such as those for working capital and profit margins. They should be consistent with sales expectations such as product availability and delivery completeness. And they should meet marketing needs such as market share and new product support.

In that sense, supply chain metrics can resemble the following examples:

Days Inventory Outstanding (DIO)

This is the amount of inventory in relation to sales (usually expressed in monetary terms). This becomes important when interest rates are high or the possibility of obsolescence is high (e.g. electronic products). For mature industries with a low interest rate regime, DIO may not be as important although it may still be relevant especially if the firm has a large selling market and many products.

% Out of Stock

This is the ratio of number of items out of stock versus the total number of items actively sold by the firm.

Order-to-Delivery Time & Completeness

This measures how well the supply chain delivers customer orders. If the supply chain is able to deliver complete and on-time 95% of orders received, that would imply the firm is satisfying 95% of customer demand but still has an opportunity to improve sales by as much as 5%.

% Perfect Product Launch

This is an indicator of how well the supply chain supports the introduction or launch of a new product based on set criteria (e.g. meeting target cost or volume). This measure is important for industries that often introduce new products or services to stay competitive. The automotive, furniture, and fashion industries are some examples where this performance index may be useful.

Total Delivered Cost

This is the cost to deliver one unit of one product item. This includes the cost of materials purchased, operating expenses, and the cost to transport or deliver one item of product to the customer. This is a challenging measure as managers may have difficulty determining the cost of one unit of a particular finished product especially if the company’s products are made under the same roof and share common materials.

Defining the total delivered cost is achievable as there are available analytical methods that would enable firms to monitor this quite useful supply chain metric.

Supply chain metrics usually follow a tiered structure. ‘Top tier’ measures such as the aforementioned examples are often the bases for lower-tier measures within the supply chain. Examples of lower-tier measures include transport turnaround time, inventory record accuracy, and manufacturing reliability. Supply chain executives may interpret lower-tier measures as those that belong to functional subordinates but as mentioned above, metrics shouldn’t be set up for just the sake of defining accountability; they should be geared towards the firm’s overall strategic goals.

Many firms are far from having key performance measures that actually would provide effective and actionable data. Hence, there lies the challenge supply chain executives face in defining critical measures that would have potentially unparalleled benefits for the firm.

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About the author

Jovy Jader

Managing Partner, Prosults Consulting LLP

Jovy is a supply chain consultant and speaker of Prosults Consulting LLP. His clients include multinational companies in the food, pharmaceutical, consumer goods, energy, and export industries. He is the author of Speed Kills…Your Competition “Driving Growth Through Supply Chain Excellence”, and has been a regular contributor to BusinessWorld. Jader was with Procter & Gamble Philippines and PriceWaterhouseCoopers, assisting companies across Asia in Supply Chain Management improvement projects. Jader holds MBA from the University of the Philippines and a BS in Chemical Engineering from Pamantasan ng Lungsod ng Maynila.

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