Performance Measures for Supply Chain

W S William

The saying goes, You get what you measure. Knowing precisely what to measure is sometimes complicated.

Let us look at some of the traditional functional performance measures.

Manufacturing Sales & Marketing

Engineering/ R&D

Unit cost Market share Function/features Labor cost Labor & material Revenue Labor productivity cost Sales growth Quality, scrap rate Time-to-market Plant utilization New hot products Award-winning Plan vs. actual Customer satisfaction designs production Design for manufacturability assembly, etc.

Supplier/Manufacturer
Plant utilization Cost Quality, scrap rate Safety Labor productivity Plan vs. actual production Inventory levels Supplier/manufacturer profit

Distributor/Retailer
New hot: products Gross margin ($)

Fill rate
Stock-out rate Retailer/distributor profit

The traditional metrics might have worked well in the past but it can get in the way of effective supply chain management.

Now the competition is Supply chain vs. Supply chain.

Aligning Metrics and Business Strategy (Value Proposition)

The value proposition answer the question :

Why do customers buy from us ?

The business strategy answer the question:

How can we ensure that customers will continue to buy from us ?

Examples of Metrics that are Mis-aligned

Dell
Initially thought that customers are interested in buying fastest processor available.

Later found that customers wanted a consistent and common platform across all users. Consistency was counted because that would make technical support much simpler.

 Dell Latitude notebook features:

Component stability, consistency and backward-compatibility

Dell Inspiron notebook features:

Fastest available processor speed and high-end graphic component

 General Electric Aircraft Engines (GEAE)

Formerly measured the performance of their aircraft engine overhaul shops by turnaround time, or TAT Faster this time, the less time their customers wait for that engine.
But GEAE found that the airlines were more interested in a metric called W2W (Wing-to-Wing)

W2W is the time from the moment an engine is removed from the wing of an airplane to the time the repaired (or a replacement) engine has been mounted.

This represents the total amount of time an expensive airplane is out of service due to engine maintenance or swapping.

TAT vs. W2W

Removal from wing

TAT (Overhaul) Time

Re-installation on wing

W2W Time

Time

How would you improve W2W time, as opposed to simply improving TAT ?

GEAE added more engine overhaul sites around the world so that the transport time to an overhaul centre was shorter.

 Call Centers (mis-aligned metrics)

Many call centers are evaluated on the basis of call center productivity ie number of calls handled per operator per hour It is easy to measure but could encourage poor service. Many companies are using two-dimensional metric including both productivity and quality of experience as rated by the customer.

 The metrics you use must be tailored to your companys strategy

Major Classes of Metric for Supply Chains

Service Metrics how you meet customer needs Inventory Metrics how much inventory you have

Time/Speed/Flexibility Metrics
how quickly can you respond to new developments Financial Metrics how supply chain management affects your bottom line

Service Metric under Build-to-Stock Fill Rates : means how many of our customer requests were met without delay Order Fill Rate : measures the percentage of complete orders met without delay Line Item Fill Rate : takes an order for multiple SKUs and treats each line of the order as a separate request , measuring the percentage of line items within each order that are met without delay.

 Unit Fill Rate : measures the percentage of units ordered that are filled without delay

Example
Suppose you sell coloured pens, and you receive the following orders: Item Quantity Red Pen 10 Blue Pen 1 Green Pen 2 Suppose you were stocked out of red pens temporarily, but had sufficient blue and green pens to meet the remainder of the order. What is your line item fill rate ? [2/3 or 66.7%] What is your order fill rate ? [ 0%] What is your unit fill rate ? [3/13]

 As a customer, which metric would you prefer ?

Order Fill Rate vs Line Item Fill Rate

If you have 95% average line item fill rates,

Probability of complete order fill for 2-line order = 0.95x0.95 = 0.9025 or 90.25% Probability of complete order fill rate for 14-line order = (0.95) to the power 14 = 0.4877 or 48.77%

 If we receive an order for 100 different SKUs, Probability of filling that order completely would be near zero ie 0.95 to the power 100 = .0059 or 0.59% So an order fill rate metric may not reflect your business need.

Fill rate measure the successes

What happens to unfilled requests of failures ? It is an important question in SCM Backorders vs. Lost sales Lost sales metric (difficult to measure in many situations)
(If order for specific items are defined and fill rates are known,lost sales metric can be tracked)

Time to fill the backorders

 Different fill-rates for different items can be a wise idea !

Service Metric under Build-to-Order

Promised Response Time or Lead Time

% Completed on Time Aging of Late Orders ie how long it took to fill a late order

Inventory Metrics

 There are two issues; Inventory and Service level In your organization, two different groups are responsible for these or a single group is responsible for both.

Three major inventory metrics used in SCM are:

Inventory Value

Inventory Turns
Inventory as a Time Supply (e.g. , days of Inventory)

Speed and Flexibility Metrics

Promised lead times to customers

Lead time at a node Complete supply chain lead time Cash-to-cash cycle

The Cash-to-Cash Cycle

Acquire Material Pay for Material Sell Output Receive Payment

Inventory Accounts Payable Accounts Receivable

Cash-to-cash cycle

Time

CCC = DIO + DSO DPO

CCC (Cash Conversion Cycle) DIO (Days of Inventory Outstanding) DSO (Days of Sales Outstanding) DPO (Days of Payable Outstanding)
DIO = Average Inventory / COGS per day DSO = Average Accounts Receivable (AR) / Revenue per day DPO = Average Accounts Payable (AP) / COGS per day

Financial Metrics

ROI (Return on Investment) = Net Income/ Investment EVA (Economic Value Added) = Net Profit minus charge for invested capital

NB : All figures are in Rs. Crores

Item

Year 2013

Year 2012

Revenue

5103.0

Not needed

COGS

3533

Not needed

Inventory

1314.0

1274.6

A/R

99.1

91.5

A/P

828.9

745.1

Average Inventory

(1314.0 + 1274.6) / 2 = 1294.3

Average AR

(99.1 + 91.5 ) / 2 = 95.3

Average AP

(828.8 + 745.1 ) / 2 = 787.0

Bullwhip Metric

Metric to assess wildly fluctuating orders in upstream portion of the supply chain. Bullwhip Metric = Standard Deviation of Weekly Orders / Standard Deviation of Weekly Sales = 229 / 65 = 3.52 [for example] If there were no bullwhip effect, we would expect this ratio to be approximately 1.0

Bad Metrics

Plant or equipment utilization

If the decision does not affect the cost,then the cost should not affect the decision. SingleFactor Productivity Metrics

Metric for the Entire Supply Chain

A solid theoritical idea runs into many practical problems when one considers real-world supply chains.
How do we proceed , given this real-world complexities ? Just keep in mind the entire supply chain when assessing changes.

Roadblocks to Chain-Wide Metrics

Thank you