CONTRIBUTION BY TOM CRAIG – SUPPLY CHAIN AND LOGISTICS CONSULTANT AND PROFESSIONAL AT LTD MANAGEMENT
First, the metrics discussed here are for manufacturers, retailers, and distributors. This is important and why they are THE supply chain metrics.
Metrics are a way to measure performance; and, in turn, communicate that information to key executives in the company. Their value is how supply chain management is supporting the direction and strategy of the business. It is important that they present a strategic and tactical understanding of what is happening and how well it is happening.
Supply chain management is a process that flows across the organization and from suppliers through to customers or stores. The challenge of a supply chain is the length; scope; geographic reach; number of internal and external stakeholders and participants; and overall complexity. No other activity has all this—suppliers and factories around the world and global customers.
Supply chains are non-linear, not linear as some project them. There are supply chains within supply chains. Viewing non-linear supply chains as linear contributes to performance issues and to measuring operations.
All these make it difficult to select the proper metrics. There are numerous metrics. Good metrics should measure the performance of the total supply chain, more exactly the process.
KPIs (key performance indicators) must be measurable. As a result, numerous metrics are about the logistics components. Some of these are good. However, they do not present a view of the total supply chain. Plus, many have little or no usefulness for the C-suite. Assessing logistics parts is a node-link approach and does not recognize the supply chain process.
Supply chain management is a process that is often measured on its logistics costs. That approach is a root cause of issues. Such computations do not measure the supply chain or its performance and can include factors outside of the supply chain. In addition, the way accounting treats supply chain costs is dated. They go back a hundred years, before supply chain management and global activity were recognized.
Supply chains are being transformed. The Amazon Effect has stimulated the beginning of a global supply chain revolution. It is moving beyond e-commerce/B2C and is crossing industries and markets.
Traditional supply chains for retailers and manufacturers face issues with omnichannel, its different markets, and new ways to reach customers, including end-user ones. The underlying expectations are pushing supply chain transformation. In turn, this means improved performance and new metrics.
Supply chain complexity raises the question of whether measuring the overall supply chain is sufficient. Segmenting can reflect similar supply chain characteristics, business unit, or other ways. Supplementing the macro performance with segmented KPIs provides understanding and insight to what is happening on both centralize and “decentralized” views. It enables seeing underlying factors to the “corporate” measure.
Another topic is how many metrics to have. Too few supports the view of a monolithic, linear supply chain. Too many metrics can become measures for measures sake.
The best four metrics that define supply chain performance are:
(1) Inventory Velocity. Inventory has been a hot button with dual challenge of capital tied up and while being able to service sales orders. With omnichannel and meeting customer expectations, it has become hotter. Aligning inventory and the supply chain network is an additional challenge. Moving inventory more quickly through the supply chain has become a requirement. This is also important with inventory planning and with being able to respond to positioning products.
This is also a good metric for tactical issues, such as the working capital mandate.
It is important for lean and the waste of excess inventory. In many of these cases, inventory is stationary, not moving dynamically across the supply chain. Speed increases the value of inventory, while reducing working capital. It is critical with aligning networks, positioning inventory, and satisfying customer requirements.
Inventory control is outdated in a business world defined by speed—from decision making to customer expectations. Supply chain management is pivotal in achieving the many forms of velocity. Also, inventory management, as traditionally understood, has been replaced by alignment and by velocity.
Velocity can be measure as turns or days of inventory. It can be applied to finished goods; WIP (work in process), especially that is transferred to another location; and raw materials. Segmenting as to division, product category, or other relevant ways for the company is important.
(2) Time Compression. This KPI ties to inventory velocity and is an integral part of the providing the immediacy customers want. Time is a hidden waste both inside and outside the company and is an enemy of supply chains. Reducing it is important with the new business reality.
Measuring time and compressing it must be done across the total supply chain—from suppliers through to customers (and/or stores). This means breaking it down by inbound, outbound, and stationery—sitting in distribution centers and factories.
Remember, time is important with building inventory velocity and minimizing inventory waste. There are two points here. One is that the largest time sector is with the inbound supply chain, especially if there is international sourcing. The other, and often overlooked, is the non-movement part. That is a fixed block of time that is not compressed, unless it is recognized.
(3) Perfect Order—Customer. This is an outstanding metric. The KPI comes from the SCOR (Supply Chain Operations Reference) model. This metric is about the customer. It validates the customer mantra. This is what customer service is—delivery of orders, complete, accurate, and on time. It is implicit in a customer’s doing business with a company. But, as simple as that sounds, firms struggle with it.
The new reality of selling for manufacturers and retailers is the customer experience and meeting customer requirements. Service expectations have been elevated. It is not limited to B2C and is spreading across industries, markets, and B2B. Omnichannel is everywhere. Speed is expected. That makes this metric vital.
(4) Perfect Order—Supplier. The supplier is at the opposite end of the supply chain from the customer and the perfect customer order. This metric then creates a yin and yang. Supplier performance—purchase orders delivered complete, accurate, and on time—is very important to supply chain success.
This is a fundamental metric. Supply chain performance begins on the inbound side with suppliers. The impact of weak supplier accomplishment ripples throughout the supply chain and impacts the actuality and fundamentals, both operational and financial, of the company.
The four metrics triumph because they recognize and deal with the entire supply chain and its process. Success with them can mitigate company failures and problems with sales, growth, and profitability. The four metrics have value across markets, industries, and businesses. They are inter-related, connected, and bring cohesion to the supply chain, what it does, and how it does it. These define it and provide a way to see the intricacies and convolutions which can be lost in the daily happenings. They recognize what can be viewed as unrelated parts of the supply chain—when they are not.
The four metrics triumph because they recognize and deal with the entire supply chain and its process.
For example, the two perfect order measures highlight the supply chain. Add the time compression and inventory velocity that recognize the speed which has become a requirement of business. This is especially true for retailers and manufacturers dealing with duality of omnichannel and its selling to intermediaries, directly to end-use customers at their designated locations, and through ways that has customers coming to merchandise. The traditional ways no longer function as they once did.
The challenge to improving performance is ongoing. Success lies at the macro and granular levels. Some of the work ahead includes:
- Focus and improve the process
- Increase visibility across the supply chain
- Integrate the financial supply chain with the product supply chain.
- Align the inventory network
- Extend the supply chain upstream
- Implement advanced integration of process and technology