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.
Manufacturing Sales & Marketing Engineering/
R&D
Unit cost Market share Function/features
Labor cost Revenue Labor & material
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 Distributor/Retailer
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 profit
Inventory levels
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 from TAT (Overhaul) Time Re-installation

wing 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 Pay for Sell Receive

Material Material Output Payment

Inventory

Accounts Accounts
Payable 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 (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