The old adage “Show me how you measure me, I’ll show you how I behave” holds true within any relationship. The metrics against which the success of a supply chain is based should not only monitor suppliers performance but correlate with the strategic requirements of an organisation. Today a vast amount of data is available for every aspect of a supply chain, and this can create confusion if key areas are not focused on for measuring and monitoring. Identifying the data that matters, and extracting it from the noise is vital when wanting to ensure that one’s supply chain is performing as expected.
What to measure?
An important overall metric is that of “The Perfect Order”, or how often does your supply chain get it right. Depending on the organisation, the ideal order can be calculated by using the percentage of complete orders multiplied by accurate invoicing. A complete order is one that was delivered undamaged, on-time and in full, and by using this information combined with billing data one can calculate the overall success of each order from dispatch to the customer. This metrics allows one to calculate how often one's supply chain performs perfectly and such data can be indicative of customer satisfaction levels, as well as aid in identifying where things go wrong.
What about inventory
Within most organisations, free cash is a vital financial metric which determines the overall health of the business. The supply chain metric referred to as the cash-to-cash cycle time reflects the length of time between paying for raw material and receiving payment from the consumer. The cash cycle time indicates how quickly money is available, and often this impacts on an organisations ability to, among others, reorder stock. By decreasing the time of a cash cycle, an organisation has access to more cash, more often, which directly influences profitability.
Within inventory management, a host of metrics can be used to manage a warehouse. Since a warehouse is often considered an expense within a supply chain, it is useful to monitor parameters such as the inventory-days-of-supply, capacity-utilisation and cost-per-line-item-picked. Inventory days of supply represent the number of days it would take to run out of stock if not replenished. This measure allows an organisation to accurately balance the need for inventory holding against the need for cash flow, for example. Capacity utilisation indicates the amount of space within the warehouse that is used – allowing for organisations to determine if they are for example, able to handle peak demands, or if they are indeed running a facility too big for their needs. Costs associated with order picking are often extensive, including people, technology, equipment and rentals. A simple method to calculate a cost per line item picked is to divide total warehouse costs by the number of items shipped. This cost can then be managed in order to drive it down, while not jeopardising warehouse efficiency.
Metrics should not be put in place simply as part of the process, they should be meaningful, easy to understand and reflective of the core objectives within a supply chain. Good KPI’s should not only accurately reflect the areas of value within the chain, but do so in a manner that encourages continuous improvement and efficiencies.