Big supply chain fails rack up huge costs to businesses including loss of sales and market share, or in worst-case scenarios, loss of stock value or even bankruptcy.
Without trying to be the soothsayer for the day, it’s important to keep in mind what’s at stake if you’re trying to achieve an end-to-end supply chain through IT performance. The last thing you want is a blunder to cost you $100 million as it did with Nike in 1999.
Technology has come a long way since 1999, and in many ways, technology has made business processes simpler, but in some ways, it’s also gotten more complex as troves of data sometimes confuse businesses if they can't properly harness it.
In this post we endeavour to breakdown supply chain metrics you should be measuring, but first we look at your operational type to gain a better understanding of how to use those metrics.
Know your businesses operational type before you begin
Getting a daily overview of your daily supply chain operations is now an increasing necessity for most businesses. If you are trying to reach or grow business goals, or merely keep up with the competition, how can you do this effectively if you’re not measuring your supply chain performance?
Most businesses fall in to one of three operational types with a focus on either the customer, product or operational efficiency.
Companies that fall into this category focus on the customer experience; or in other words, rank highly in regard to value-add. Here flexibility in the supply chain is key; reacting to any changes to ensure your operations are responsive to customers needs is essential.
Questions to ask: was the purchase order delivered in full and on time, is there anywhere in the supply chain that could be amended to make delivery even faster, are there easy return options/instructions for customers?
Companies who fall into this category don’t have to be as reactionary as service excellence businesses. The idea here is that the product speaks for itself, so it’s ok if the customer has to wait a few days for cheaper delivery options. When it comes to service excellence, the fastest shipping option (even if it’s more expensive) will prevail because it’s all about the customer experience. When it comes to product excellence, it’s about delivering great value at minimal cost, and the reliability of the supply chain is preferred over speed.
Questions to ask: is the cost of delivery in line with the costs of goods solved, are there any costs within the supply chain that can be reduced, is labour utilisation optimised wherever possible, is automation used where possible to drive down costs?
Eliminating waste in every stage of the supply chain is paramount here. This operational type anticipates problems early on so as to avoid a negative impact on financial performance. Here, even minor tweaks in picking and packing could save the business thousands of dollars in the long run. Lean businesses track benchmarked KPI’s daily to weed out any inefficiencies.
Questions to ask: are all assets in the supply chain being utilitised, are processes automated where possible, is the warehouse set up optimally, are stock levels managed and anticipated, are queues and wait times reduced as much as possible?
Now that you understand what your business operational type is, it will make tracking your metrics easier. Let’s take a look at 6 key KPI’s to get you started.
Key metrics for supply chain management
1. Freight cost per unit
Measure the cost of freight per item to reduce freight costs per unit
Total freight cost / number of items
2. Inventory turnover
Indicates how much inventory is sitting around and what inventory moves fastest.
Cost of goods sold / average inventory
3. Inventory accuracy
Compares inventory sold as according to the bookkeeper to actual stock levels
Items in stock / what’s recorded in database
4. Units per transaction
Helps businesses reach target values by measuring units sold over a given period of time.
Items sold / number of transactions
5. Perfect order rate
In a time where service excellence is a given, it’s important to track how many transactions go through without any errors. Measuring this will help you maintain good customer service
(total orders-error orders) / total orders
6. Back order rate
Measure how many orders cannot be filled at the time of ordering to uncover any blind spots in the supply chain
Total number of orders – back orders
Selecting the right metrics you want to measure
This is where the tricky part kicks in. Selecting the metrics you want to measure or benchmark isn’t as easy as it may seem off the bat. It may take trial and error to get it right, but once finished it will provide invaluable insight into your supply chain and daily operations.
So why is this so tricky? If you start off by measuring too many metrics, you might get too bogged down in the finer detail while missing the underlying meaning of what the data is telling you. But without measuring enough metrics, you won’t have the volume of information required to make strategic decisions.
The tricky part is getting the right number and combination of metrics that gives you a good look into how your supply chain is operating. Once established, you can use calculations based on industry standards to give you an objective overview of your supply chain's performance.
Before you begin choosing which metrics will suit you most, consider the below sinmple tips.
Keeping a close eye on your overall costs will be important to keeping a lean supply chain, so measuring freight cost per unit and inventory turnover is important for your overall growth.
If you’re looking to improve the customer experience, keep an eye on your perfect order rate vs your back order rate. This should give you a good idea of how many satisfied customers you have that will be happy to repurchase.
Did we miss any key metrics? Let us know in the comments below.