SUPPLY CHAIN METRICS-THE GOOD, BAD AND UGLY
Supply Chain Asia
SUPPLY CHAIN METRICS-THE GOOD, BAD AND UGLY
You aren't feeling well, so you take your temperature. Temperature is a measure of wellness. How well is your supply chain performing? How responsive is it to customer requirements? Are your customers satisfied? Are you satisfied? Can you pinpoint what is going well or not going well?
Many companies cannot answer these questions. They have no measures for their supply chains or they have poor measures. That is incredible given the importance, complexity and scope of supply chains with international sourcing and competitors.
Such companies have the supply chains they designed and deserve. Supply chain management excellence is no longer a matter of competitive advantage. It is a matter of survival. Meeting-and exceeding--customer expectations requires it. Firms that do not include supply chain management as a core competency do not lead and do not do a good job at following. They often flounder from one "management du jour" theme to another seeking something they are lack. Such firms look to benchmarking, instead of metrics, to tell them how they are doing. There miss the irony in their search to compare what other firms do with how they perform while they do not have solid supply chain metrics.
Manufacturers, wholesalers, distributors and retailers are dealing with long supply chains, both in time and distance. The extended supply chains have added to the inventory that firms must carry, whether they book it upon arrival at their facility or when it is ready to ship from a foreign city. It is still their order and their inventory.
Add that product life cycles are continuing to shorten. Factor in too that forecasting reflects the past, while new products and new markets have as, not real, historical basis. The length of supply chains exceeds the accuracy of demand planning, sales and operations management and forecasting. All of this adds more unknown and uncertainty to meet customer demands, to manage capital invested well in inventory, and to maximize revenue and profits. It compounds the challenge to design and to manage effective supply chain strategic and tactical programs and the process, technology and people to support them.
All of the realities of competing demands viable supply chain metrics. The challenge is use quality metrics. There is no dearth of measures used by firms. Unfortunately many of them have nominal value. They may be what, in today's business world, Shakespeare would call "much ado about nothing."
Costs. A common such metric involves costs. These include, but are not limited to-
*Outbound or inbound freight costs
*Inventory carrying costs
*Logistics costs as a percent of sales
None of these measures really show supply chain operations effectiveness. Metrics are to show how well-or not-a company is performing. Costs do not reflect activity; they reflect the result of an activity. But there is not necessarily a direct correlation. Both internal and external factors, outside of the supply chain, can impact supply chain costs.
For costs to be a useful metric, there would have to be constancy to the business as to customers, customer ship-to locations, products purchased, order size, markets or channels of distribution. Any changes in these make comparisons and trends not useful. Sourcing from a supplier in Ningbo versus Yantian can change inbound logistics costs. Outbound freight costs can change based on shipment size and destination and products. Warehouse costs can change based on order size and products. Such changes are beyond the control of the supply chain. As a result, such measures do not show performance.
Order Fill or Back Order. Either sounds good. But its underlying purpose is to track a problem, not to drive supply chain excellence. Fill issues reflect demand planning, forecasting, supplier performance and other issues. Those are what should be addressed. It is a measure to backup a problem. It diverts attention from the real need. Such a measure can also create unintended problems as people may delay shipping partial orders in order to have a complete order fill. The delay can cause other customer satisfaction problems.
Product or Shipment Damage. This measure is similar to order fill. It reflects a problem with packaging design, carrier or other problem. It is not a metric that goes across the supply chain.
GOOD MEASURES. Useful metrics go across the enterprise. They tie to the company strategy and show meaningful performance.
Perfect Order. This is an order that is delivered complete, accurate and on-time. This is a SCOR (Supply-Chain Operations Reference) model and measure. It is definitely tied to the company success, crosses the organization and is focused. It is what customers want and expect. The measure can be used both for the company performance with customer orders and with supplier performance with purchase orders. The metric by its scope has several parts-delivered (not shipped) on time, complete and accurate. Like supply chain management, it is the result of the process and includes external participants. SCOR also uses multiple levels with its metric to drill down to and across the supply chain.
Time Related. Customer expectations may exceed customer requirements. Time is a critical element to business success. How fast (length of time)-and how well (dependability or variability)-the organization and the supply chain perform is significant to satisfying customer expectations. Time, both speed and reliability is very important to the company's success with both revenue and profitability.
Purchase order to cash cycle time, for example, goes across the firm and beyond to include suppliers and logistics service providers. Compressing the cycle means everything from increased inventory velocity to excellent supplier performance to outstanding receivables management-and more.
There are useful functional measures that can be used for transportation, warehousing and other areas. The metrics can show performance within the function or, even better, be a subset of the larger, excellent supply chain metric.
CONCLUSION. Metrics are important. Poor measures and measures for the sake of measures waste resources and divert attention from important areas. Quality metrics are important as compared to quantities of metrics that measure everything and yet measure nothing at all. Technology is useful to developing good metrics and to regularly measuring performance. Quality metrics are proactive tools to validate strategy, tactics and performance. They identify and drive process improvements and to exploit technology and support the efforts of people. Good companies and good supply chain management divisions use them wisely and well.
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