As the saying goes, what gets measured gets improved. The same is the case with supply chain management. End to end supply chain operations related to planning, sourcing, production and logistics have specific metrics that help us improve processes and overall performance.
For every metric, there is a target number or goal that needs to be agreed upon. Then, each of those metrics is linked with a strategic objective or a key value driver (KVD), and is further supported by planned initiatives that help in achieving the target or goal.
Demand Planning Metrics
Demand planning metrics relate primarily to forecast error metrics. They include:
- Mean Absolute Percentage Error [MAPE]
- Weighted Absolute Percentage Error [WAPE]
- Mean Squared Error [MSE]
- Forecast Bias, and
- Forecast Value Added [FVA]
Of these, Forecast Bias and FVA are critical and should be tracked over the planning time horizon. Bias indicates the direction of the forecast errors and helps us understand whether we are under-forecasting or over-forecasting.
FVA is a measure of the value added during the forecasting cycle. It is measured by comparing forecast accuracy before and after each activity in the demand forecasting and planning process to determine if that activity improved the accuracy of the demand forecast. Tracking FVA during the forecasting cycle enables us to find the right mix of quantitative and qualitative approaches that result in fewer errors.
Supply Planning Metrics
Supply planning metrics are related to sourcing and production. They include:
- Order Confirmation to Delivery Lead Time
- OTIF % [On Time in Full]
- Material Availability for Monthly Production Schedule
- % Rejections and % Returns
- Spend Analysis [By Product Mix and Supplier]
- Direct and Indirect Category Analysis and
- Supplier Performance Index
These metrics allow us to understand supplier performance and to perform spend analysis.
- Production/Manufacturing metrics include:
- Daily schedule adherence
- Production loss
- SKUs with excess production
- SKUs with shortage in production
- Line Utilization %,
- OEE% (Overall Equipment Effectiveness)
It is essential to segregate the metrics into daily, weekly, monthly and quarterly buckets. However, the most crucial performance indicator is OEE % as it gives a snapshot of equipment productivity, product quality, utilization and speed.
During S&OP meetings, the appropriate metrics are reviewed and discussed with the respective functional teams during each phase or step of the S&OP cycle.
Logistics & Distribution Metrics
This section covers metrics related to warehousing, transportation and distribution operations.
- Dock to Stock Cycle Time
- Inventory Accuracy %
- Operating Costs [Budget vs Actual]
- Detention Costs
- MHE Utilization %
- Process Productivity Metrics
- Order-Delivery Cycle Time and
- Environment-Health-Safety Metrics
The metrics that are critical and need extra attention are the ones related to inventory management and customer order management. Accurate inventory management within the warehouse is critical to ensure correct order picking, packing, staging and loading operations. End to end order management from order receipt to fulfilment to proof of delivery are central to warehouse operations.
- Truck Placement Reliability
- Loading Time
- Unloading Time
- Transportation Lead Time
- Operating Costs
- Vehicle Capacity Utilization %
In the case of transportation, vehicle arrivals at the appointed times are critical for timely onward operations. Monitoring transportation lead times are also essential, especially for last mile deliveries.
- Despatch Schedule Adherence
- OTIF [On Time-In Full] %
- Customer Order Confirmation to Delivery Lead Time
- Product Returns %
- Customer Satisfaction Score
As an extension, customer satisfaction and product returns metrics need to be measured and monitored. Most 3PL and 4PL service providers invest in processes and systems related to customer issues. Order fill rates and customer satisfaction metrics need to be focused upon and prioritized.
Other Relevant Metrics
The advent of e-commerce and quick commerce has resulted in ever-increasing reverse logistics and material flows. Therefore, metrics related to reverse flows are as important as forward flows. Also, macro-economic factors, geopolitics, climate events, trade flows, fluctuating commodity prices, etc. have necessitated the measurement and monitoring of resiliency metrics.
Reverse logistics metrics
- Logistics Costs and Product Returns as a % of Sales
The challenge here is to minimize or reduce product returns and therefore reverse logistics costs. Just like the forward supply chain, designing the reverse supply chain is essential in ensuring that returned products can be inspected, segregated and reused, repurposed or refurbished depending on the type of product
- Time to Survive (TTS)
- Time to Recover (TTR)
- Financial Impact (Sales and Profitability)
Resiliency metrics became extremely important for supply chains following the COVID-19 pandemic. Companies soon realized how every supply node in the chain could affect downstream activities due to material shortages and supply delays.
For firms that had a global network of suppliers, the ‘Time to Recover’ took several weeks and months. Moreover, supply related constraints had an adverse impact on demand that eventually affected sales and profitability numbers. Firms have started to invest in tools and systems that enable ‘what-if’ scenario analysis – what the financial impact might be in case a supply node is unable to perform as planned.
Linking Operational & Financial Metrics
The various operational metrics and performance indicators listed above have a direct or indirect impact on business performance – more specifically, financial performance. Therefore, it is essential to establish a link between operational metrics and financial metrics.
The key financial metrics to focus on include:
- Cash to Cash Cycle Gross and Net Working Capital
- Inventory Turnover Ratio
- Gross Margin and Net Margin %
- Return on Assets (ROA)
- Return on Capital Employed (ROCE)
Cash to Cash Cycle, Gross and Net Working Capital and Inventory Turnover Ratio are the three metrics that should be on the radar of the supply chain management team. All the demand, supply and distribution plans and their execution have a direct bearing on the cash conversion cycle and working capital levels. ROA and ROCE are impacted by supply chain operating costs. Any reduction or saving in procurement costs, inventory handling costs, production and logistics costs shall have a positive impact on ROA and ROCE. The operational metrics can be dovetailed into a relevant business/financial scorecard every month, quarter, and financial year.
People, Processes & Systems
Finally, for any performance management philosophy to work, there is a need to put in place the right team with suitable skills and understanding of the supply chain domain in addition to devising and deploying the appropriate processes and procedures for data management (data recording, reporting, monitoring and analysis) and selecting the right tools, software and systems for reporting, analysis and visual management.
Visual management tools such as dashboards, functional control towers and related systems could go a long way in monitoring key operational metrics on a real time basis to enable course correction and development of corrective and preventive action plans going forward.