“Selecting the right measure and measuring things right are both art and science. And KPIs influence management behavior as well as business culture.”
Pearl Zhu, Author
In a data-driven business world to measure the performance of a supply chain there are a lot of metrics that can be used. Based on the type and volume of the data, each of these metrics presents a different perspective of the supply chain. However, many metrics are easy to calculate but do not necessarily indicate the actual performance of the supply chain. The most important challenge is to find the supply chain metrics that guide businesses to gain actionable insights to fulfill their business objectives.
Key Supply chain metrics
An increase in productivity, increase in customer satisfaction, and decrease in overall cost are the three main goals of having supply chain metrics in place. Below is the list of three common supply chain metrics that can be used to achieve these goals:
- Order Fulfillment – It measures the accuracy and speed with which the customer orders are fulfilled by a business. This metric is extremely vital to measure overall customer satisfaction. This can be considered as a compound metric that measures components of the delivery such as on-time deliveries, the accuracy of the deliveries, handling sales returns, and post-sales support in some cases.
- Cash to Cash Cycle Time – Also referred to as cash conversion, it is the time between the business paying cash to its suppliers and the business receiving cash from its customers. It is a metric that helps to understand the overall performance of inventory, accounts payable, and accounts receivable departments. A lower Cash to Cash Cycle Time indicates that the business can maintain a healthy cash flow rate and vice-versa.
- Inventory Turnover – It measures the number of times the inventory is sold out within a specified period. This holds key to measuring the efficiency of the entire supply chain comprehensively. Low Inventory Turnover indicates weaker sales, improper demand forecast, and results in excess inventory lying around in warehouses which increases the holding costs.
Challenges in managing supply chain metrics
Effective monitoring of supply chain metrics is key for improving supply chain performance. However, this is easier said than done. Below is the list of challenges that businesses encounter while implementing the supply chain metrics:
- Setting up the proper hierarchy – The information related to key performance metrics should flow to every level of business operation. Businesses need to communicate the need and importance of the supply chain metrics to every department. Many departments implement the metrics without the application knowledge of those metrics.
- Data Management – Supply Chains generate huge volumes of data at every stage. To create supply chain metrics that take this data as input, this data should be accurate. However, this is seldom the case with supply chain master data. Improper data practices result in inaccurate, incomplete, poor quality, and duplicate data. Businesses need to set up automated data quality checks at all stages of the supply chain to maintain the desired quality of the data.
- Technology Adoption – Many businesses are stuck in their old methods of using inefficient and ineffective manual processes. This results in redundant work and significantly impacts the key supply chain metrics. Businesses need to be flexible to the changes in the external environment and adopt the technologies which will improve their business performance. However, there are also cases where businesses select a technology that is a complete misfit to their business operations. This wastes the time and effort of the management.
- Change Management – The dynamic nature of the supply chain demands changes which might not always be acceptable to the business users. A proper change management strategy is necessary to overcome the opposition especially from the users who are unaware of the potential benefits of the change. Yet, proper mechanisms to manage supply chain changes are seen to be lacking in many organizations.
Improving the supply chain performance
Below are few points that businesses can consider to improve their supply chain performance:
- Reinforce KPIs with incentives – Incentivizing employees for reaching the desired Key Performance Indicators acts as a shot in the arm for businesses. It boosts the morale of the workforce and creates a positive work atmosphere. This can be possible only by the collective effort of management and employees.
- Integration of multiple software systems – Having a centralized ERP system helps businesses have data with a single source of truth. This helps in eliminating the data inaccuracies and in maintaining data of high quality. Also, each department within the supply chain might be using systems that suit their requirement. In such cases, a centralized system aids in integrating all these systems streamlines the flow of information, and reduces the redundancies in the data entry.
- Smart and data-driven supply chains – Supply chains are seeing a tremendous transformation with data at their core. Big Data Analytics, Machine Learning, the Internet of Things, and Artificial Intelligence are driving this digital transformation. By becoming data-driven companies can have improved accuracy, improved analysis, and better forecasting. But the question here is are businesses able to leverage this data. A truly smart supply chain empowers the users with the right data at the right time to make the right decisions by drilling down to the minute details possible. It should help businesses to simplify the processes, bring greater flexibility, and deliver the desired outcomes.
- Root-level KPI management – To ensure a supply chain function in a smooth, efficient, and consistent manner it is essential that the KPIs are managed at the root level. A bottom-up approach to the aggregation of KPIs brings control to the process and increases employee involvement.
How to start and not stop at the end of this article piece?
I would recommend starting simply by just taking this approach, which has negligible risk, simple and yet an amazingly effective positive step towards our goal of a proactive strategy
A) Take pen-paper or manual method (start now)
Start implementing the recommended strategy using your existing technology resources for a known and low-risk segment of Suppliers within your supply chain business to find out what works and what doesn’t. Indeed, this causes efforts, but this will pave the way for better clarity around unknown risks.
B) Take help from technology
Work towards making it unattended, assisted by using Super-fast digital solution such that it works autonomously without losing its efficacy by engaging a solid, affordable Business and Technology solution partner.
If you are a CEO/COO/CIO/Managing Director/General Manager who is spending more time in reactive/preventive mode than future-facing, please reach out for an exploratory conversation.
Our Contact details
Pradeep Mishra (Director and Co-founder)
pradeep.mishra@aurionsystems.com.au
Ashok Mulchandani (Partner – Business Success and Strategic Transformation)
ashok.mulchandani@aurionsystems.com.au
Amit Bhagat (Director – Business Strategy)
amit.bhagat@aurionsystems.com.au
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