8332_SCM-2013-Performance Measures for Supply Chain

7/28/2019 8332_SCM-2013-Performance Measures for Supply Chain

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Performance Measures for Supply Chain

W S William


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The saying goes,

You get what you measure.

Knowing precisely what to measure is sometimes

complicated.


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Let us look at some of the traditional functional

performance measures.


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Manufacturing Sales & Marketing Engineering/

R&D

Unit cost

Labor cost

Labor productivity

Quality, scrap rate

Plant utilization

Plan vs. actual

production

Market share

Revenue

Sales growth

New hot products

Customer satisfaction

Function/features

Labor & material

cost

Time-to-market

Award-winning

designs

Design for

manufacturabilityassembly, etc.


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Supplier/Manufacturer Distributor/Retailer

Plant utilization

CostQuality, scrap rate

Safety

Labor productivity

Plan vs. actual production

Inventory levels

Supplier/manufacturer profit

New hot: products

Gross margin ($)Fill rate

Stock-out rate

Retailer/distributor profit


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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 ?


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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 becausethat would make technical support much simpler.


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Dell Latitude notebook features:

Component stability, consistency and backward-compatibility

Dell Inspiron notebook features:

Fastest available processor speed and high-end graphiccomponent


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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 ametric called W2W (Wing-to-Wing)


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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 isout of service due to engine maintenance or swapping.


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Removal from

wing

Re-installation

on wingTAT (Overhaul) Time

W2WTime Time

TAT vs. W2W


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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.


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Call Centers (mis-aligned metrics)

Many call centers are evaluated on the basis ofcall center

productivity ie number of calls handled per operator perhour

It is easy to measure but could encourage poor service.

Many companies are using two-dimensional metric includingboth productivity and quality of experience as rated by the

customer.


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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 Metricshow supply chain management affects your bottom line


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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 ofcomplete orders met without delay

Line Item Fill Rate : takes an order for multiple SKUs

and treats each line of the order as a separaterequest , measuring the percentage of line items

within each order that are met without delay.


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Unit Fill Rate : measures the percentage of units ordered that

are filled without delay


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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]


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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%


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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.


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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


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Different fill-rates for different items can be a wise

idea !


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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


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Inventory Metrics


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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.


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Three major inventory metrics used in SCM are:

Inventory Value

Inventory Turns

Inventory as a Time Supply (e.g. , days of Inventory)


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Speed and Flexibility Metrics

Promised lead times to customers

Lead time at a node

Complete supply chain lead time

Cash-to-cash cycle


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The Cash-to-Cash Cycle

AcquireMaterial

Pay forMaterial

SellOutput

ReceivePayment

Inventory

Accounts

Payable

Accounts

Receivable

Cash-to-cash cycle

Time


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CCC = DIO + DSO DPOCCC (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


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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


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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 Inventory (1314.0 + 1274.6) / 2 = 1294.3

Average AR (99.1 + 91.5 ) / 2 = 95.3

Average AP (828.8 + 745.1 ) / 2 = 787.0

g


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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


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Bad Metrics

Plant or equipment utilization

If the decision does not affect the cost,then the cost should not

affect the decision.

SingleFactor Productivity Metrics


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Metric for the Entire Supply Chain


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A solid theoritical 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.


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Roadblocks to Chain-Wide Metrics


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Thank you

Documents

8332_SCM-2013-Performance Measures for Supply Chain