We all hope to have the perfect supply chain that runs lean and adheres to Six Sigma standards, and there are a variety of metrics that you can use to determine that performance.
Every supply chain is a little different as is every supply chain metric, so you’ll need to properly tailor the metrics you use to evaluate your strengths and weaknesses. Your task is to prioritize the most important aspects for your supply chain to make operations run smoothly and the right places to look for improvements.
The bad news in all of this is that supply chain performance is never very easy to judge so relying on metrics that are simple and quick to calculate might do more harm than good.
What Makes a Good Metric?
Key performance indicators and metrics can measure every aspect of your supply chain, which makes choosing which to track a tough decision. To help you narrow it down, let’s look at some characteristics of the best metrics for any industry.
- Measurable and relevant. The wide adoption of Big Data created a lot of new metrics that didn’t help. When selecting a metric, run a trial with the data and see if the information it provides is useful and if it impacts a business decision. If it doesn’t fit with the decision making process, it’s unlikely to be relevant and worth your time.
- Clear but not simple. Not only should a metric measure something useful, but it must be clear in its tracking and use. The best metrics are easy enough for anyone on your team to understand and clear that they’re related to what you’re hoping to measure. However, you need to avoid metrics that keep data too simple and don’t give you enough information for business insights.
- Quantitative and collectible. Data is the best friend of any metric, so your metrics must treat data well. This means your measurements should use real information that you can verify (like shipments made on time). The best quantitative metrics are also easy to collect. To actually use your metric it needs to be easy enough to collect that it doesn’t interrupt your daily operations (and get pushed aside until tomorrow).
How Do You Keep Metrics Healthy?
Not only do your supply chain metrics need to be relevant, but they also need to be something you can keep healthy and actionable.
Data health isn’t just about warehouse management to make sure everything is usable; it’s also about establishing good governance and accountability. The most important aspect of this accountability is getting someone in management to take responsibility for applying metrics to business decisions. It doesn’t matter how good you track something, you’ll never get better if no one is made responsible for applying it your operations.
Metrics also need an owner in your daily supply chain operations. This isn’t necessarily your data scientist, but should be someone who has a chance to interact with the data you’re collecting on a consistent basis. This owner needs to be on hand to track the metric and make sure data is recorded properly, providing assistance to make the information actionable.
To keep these two types of owners happy, you need to establish goals for your metrics and data programs. Setting improvement goals will give your supply chain something to strive for, so make sure they’re attainable.
Some of the best management practices for the year-end push have us give a small bonus for obtaining an extra level of production and a larger bonus for a reach goal. Treat your metrics the same way: set lower goals that are achievable but provide a bigger reward for bigger improvements.
Some Supply Chain Winners
Your supply chain has unique curves that set your business apart from everyone else, even your closest competitors. That means the final breakdown of your supply chain metrics will be just as unique.
However, there are some good metrics that have a universal appeal. Let’s look through a few of those to help get you started on the path to determining what will work for you.
Back Order Rate
This is one of the most important metrics to track for most manufacturers and suppliers, and thankfully it’s also pretty easy to track. Your back order rate is simply the number or percentage of orders that you can’t fulfill when the customer places them. The trick is figuring out how this impacts your business. Some operations may not suffer when the BOR rises because production can increase to meet demand. Others will suffer when customers are forced to wait longer. Your BOR will be closely tied to your inventory accuracy, so it’s a great place to measure, but it has the potential to turn into a larger product if you suddenly find yourself needing to drop it dramatically.
Orders that aren’t right hurt the bottom line every time. Monitoring your order accuracy is something you already do, so applying metrics to it will require an additional layer such as monitoring the movement status of orders through the supply chain and across your moves. The closer you can get to a real-time tracking the better. Real-time data can help you determine bottlenecks or areas where orders commonly shift from being right to wrong. Order tracking can also help you see new patterns, including where you may need to build your next distribution center.
Carrying Cost of Inventory
Revenue is always the biggest player in the metric space. For most of us, the biggest determiner of future revenue and current cash flow is the carrying cost of our inventory. Monitoring this carrying cost will give you insights about your production schedules and broader costs, such as the amount of insurance you need to carry. Strong data collection here can also show you areas where you can run a leaner supply chain. Adjusting your line to reduce carrying cost and keep your BOR low is a great way to increase profit.
Your supply chain will look to you to establish metrics and KPIs that can provide a smoother operation and a series of wins. To properly transform your supply chain through metrics, it’s going to take consistent meetings, a consistent way to share metrics, and rewards for hitting goals.