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Performance Measures for Supply

Chain

W S William
The saying goes,
You get what you measure.

Knowing precisely what to measure is


sometimes complicated.
OBJECTIVES OF MEASUREMENT

MONITORING CONTROLLING DIRECTING


Let us look at some of the traditional
functional performance measures.
Manufactur Sales & Engineering/
ing Marketing R&D
Unit cost Market share Function/feature
Labor cost Revenue s
Labor Labor &
Sales growth
productivity material cost
Quality, scrap New hot Time-to-market
rate products Award-winning
Plant Customer designs
utilization satisfaction Design for
Plan vs. actual manufacturabilit
production y assembly, etc.
Supplier/Manufactur Distributor/Retai
er ler
Plant utilization New hot: products
Cost Gross margin ($)
Quality, scrap rate Fill rate
Safety
Labor productivity Stock-out rate
Plan vs. actual production Retailer/distributor
Inventory levels profit
Supplier/manufacturer
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 TAT (Overhaul) Re-


from wing Time installation
on wing

W2W Tim
Time e
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 Pay for Sell Receive


Material Material Output Payment

Inventory

Account Account
s s
Payable Receivab
le

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 (1314.0 + 1274.6) / 2 = 1294.3


Inventory
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
Other metrics

Plant or equipment utilization

SingleFactor Productivity Metrics


Metric for the Entire Supply Chain
A solid theoretical 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.
Some more measures
Facilities

Facility-related metrics
Capacity
Utilization
Processing/setup/down/idle time
Production cost per unit
Quality losses
Theoretical flow/cycle time of production
Actual average flow/cycle time
Components of Inventory Decisions

Inventory-related metrics
Cash-to-cash cycle time
Average inventory
Inventory turns
Products with more than a specified number of days of inventory
Average replenishment batch size
Average safety inventory
Seasonal inventory
Fill rate
Fraction of time out of stock
Obsolete inventory
Transportation

Transportation-related metrics
Average inbound transportation cost
Average income shipment size
Average inbound transportation cost per shipment
Average outbound transportation cost
Average outbound shipment size
Average outbound transportation cost per shipment
Fraction transported by mode
Components of Information Decisions

Information-related metrics
Forecast horizon
Frequency update
Forecast error
Seasonal factors
Variance from plan
Ratio of demand variability to order variability
Components of Sourcing Decisions

Sourcing-related metrics
Days payable outstanding
Average purchase price
Range of purchase price
Average purchase quantity
Supply quality
Supply lead time
Fraction of on-time deliveries
Supplier reliability
Components of Pricing Decisions

Pricing-related metrics
Profit margin
Days sales outstanding
Incremental fixed cost per order
Incremental variable cost per unit
Average sale price
Average order size
Range of sale price
Range of periodic sales
Thank You

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