Time for a Supply Chain Metrics Cleaning
Temperatures on the rise; flowers and trees in bloom; and that time of year when we start to think of the annual ritual, spring cleaning. Wait, it’s not spring; but does that mean you have to wait another eight months to review your supply chain? Often, it becomes necessary to reevaluate how supply chain performance is measured to ensure healthy operations. Ask yourself, “Are your supply chain metrics bogging you down?”
To manage a supply chain containing complex dependencies between teams, departments and partner companies across international boundaries requires a rich set of metrics. However, companies often have too many independent metrics that can cause conflicts amongst competing supply chain functions. This can also distract from the critical objectives and tasks at hand. Functionally isolated metrics lead to sub-optimized supply chain performance. To complicate matters, departments and divisions often have different definitions for the same metric leading to disagreement on how to move forward.
Gartner has proposed the use of a Hierarchy of Metrics1 to gain alignment of performance measurements across the supply chain and to drive responsiveness and flexibility. I believe a similar approach can be applied to effectively manage the supply chain of any type of company. Implementing an interdependent hierarchy of metrics can drive balance between conflicting goals and consensus on the best course of action.
At the top of the Gartner Hierarchy of Metrics is “Demand Volatility” reflecting that forecast accuracy (Read Eight Methods that Improve Forecasting Accuracy white paper) has the largest direct effect on the allocation of available capacity and resources. This holds true no matter if your company is a retailer, wholesaler, distributor, or manufacturer. Improving forecast accuracy has one of the biggest impacts on improving service levels and reducing costs. On the next level, Gartner lists “Perfect Order” and “Costs”. These three metrics, making up the top tier of the hierarchy of metrics, provide the means to assess the health of the supply chain through demand forecast accuracy and the tradeoffs between costs and customer service.
The middle tier of the Gartner Hierarchy of Metrics contains metrics to diagnose supply chain performance through financial measurements including Cash-to-Cash Cycle Time, Accounts Payable and Accounts Receivable Days Outstanding and Total Inventory Days. These metrics help measure how fast your supply chain is creating value. Regardless of your industry or operating model, these metrics are equally important.
The bottom tier measures operational excellence through schedule adherence and asset performance. The Gartner model includes, Supplier Quality and On Time Performance, Total Raw WIP & FG Inventory, Purchasing Costs, Direct Material Costs, Perfect Order Detail, Production Schedule Variance, Plant Utilization, Order Cycle Time, and Cost Details. Depending on your industry, there is some variation on lower tiers of the hierarchy. These operational excellence metrics assist in identifying the root cause of readings of upper tier metrics and focusing on the specific areas that need attention. This bottom tier of metrics need to be customized to the individual company to reflect your organizations priorities and objectives.
Although it is important to have a diverse set of standard metrics, it is also critical to have metrics that individuals and departments can own. Gartner says a best practice is to start simple and to focus metrics on the most important challenges or problems. Fewer meaningful and insightful metrics that lead to a common knowledge base and clear understanding on how to make improvements are better than many metrics that lead to conflict and confusion.
Metrics that can be viewed as soon as data is updated in your Supply Chain Planning (SCP) System of Record (SOR) are more actionable and therefore more valuable than metrics that can only be viewed after exporting data from your SCP SOR to a third party system. Industry leading SCP SORs have built-in numerical and visual metrics as part of the user interface to provide ready and relevant analysis capabilities. In todays fast paced supply chain having access to metrics next week or even later in the day has the potential for leaving money on the table.
Do you have the metrics you need to manage your supply chain? When was the last time you reevaluated how you measure supply chain performance?