Supply Chain Performance Measurement

Supply Chain Performance Measurement

Supply chain performance measures can be classified generally into two categories: qualitative measures (such as customer satisfaction and p... 5:52 AM

Supply chain performance measures can be classified generally into two categories: qualitative measures (such as customer satisfaction and product quality) and quantitative measures (such as order-to-delivery lead time, supply chain response time, flexibility, resource utilization, delivery performance, etc.). Here we can discus only the quantitative performance measures. Improving supply chain performance requires a multi-dimensional strategy that addresses how the organization will service diverse their customer needs. While the performance measurements may be the specific performance goals of each segment may be quite different or may be quit similar.

The Quantitative metrics of supply chain performance can be classified into two broad categories:

i) Financial and

ii) Non-financial

Financial Measures
There are several fixed and operational costs associated with a supply chain. Ultimately, the aim is to maximize the revenue by keeping the supply chain costs low. Costs arise due to inventories, transportation, facilities, operations, technology, materials, and labor. The financial performance of a supply chain can be evaluated by looking into the following items:

- cost of raw material
- revenue from goods sold
- activity-based costs such as material handling, manufacturing, assembling, etc.
- inventory holding costs
- transportation costs
- cost of expired perishable goods
- penalties for incorrectly filled or late orders delivered to customers
- credits for incorrectly filled or late deliveries from suppliers
- cost of goods returned by customers
- credits for goods returned to suppliers

Typically, the financial performance indies can be put together using the following major modules: activity based costing, inventory costing, transportation costing, and inter-company financial transactions.

Non-Financial Performance Measures
Important metrics include:

i) Cycle time

ii) Customer service level

iii) Inventory levels

iv) Resource utilization

v) Performability

vi) Flexibility and

vii) Quality.

There is a detailed discussion of these in. We will focus here on the first four measures.

Cycle time (CT/ LT)
The end-to-end delay in a business process is called Cycle time or lead time in supply chain.. For supply chains, the business processes of interest are the supply chain process and the order-to-delivery process.Likewise , we need to consider two types of lead times: supply chain lead time and order-to-delivery lead time. The order-to-delivery lead time is the time elapsed between the placement of order by a customer and the delivery of products to the customer. If the items are in stock, then it would be equal to the distribution lead time and order management time. If the items are made to order, then this would be the sum of supplier lead time, manufacturing lead time, distribution lead time, and order management time.

The supply chain process lead time is the time spent by the supply chain to convert the raw materials into final products plus the time needed to reach the products to the customer. It thus includes supplier lead time, manufacturing lead time, distribution lead time, and the logistics lead time for transport of raw materials from suppliers to plants and for transport of semi-finished/finished products in and out of intermediate storage points. Lead time in supply chains is dominated by the interface delays due to the interfaces between suppliers and manufacturing plants; between plants and warehouses; between distributors and retailers; etc. Lead time compression is an extremely important topic because of time based competition and the correlation of lead time with inventory levels, costs, and customer service levels.

Customer Service Level (CSL)
Customer service level in a supply chain is a function of several different performance indices. The first one is the order fill rate, which is the fraction of customer demands that are met from stock. For this fraction of customer orders, there is no need to consider the supplier lead times and the manufacturing lead times. The order fill rate could be with respect to a a field warehouse or central warehouse or stock at any level in the system. Stockout rate is the complement of fill rate and represents the fraction of orders lost due to a stockout. Another measure is the backorder level, which is the number of orders waiting to be filled. To maximize customer service level, one needs to maximize order fill rate, minimize stock-out rate, and minimize backorder levels. Another measure is the probability of on-time delivery, which is the fraction of customer orders that are fulfilled on-time, i.e. within the agreed-upon due date.

Inventory Levels
Since inventory carrying costs can contribute significantly to total costs, there is a need to carry just about enough inventory to satisfy the customer demands. Inventories held in a supply chain belong to four categories:

1. Raw materials
2. Work-in-process / WIP (unfinished and semi-finished parts)
3. Finished goods inventory
4. Spare parts.

Each type of inventory is held for different reasons and there is a need to keep optimal levels of each type of inventory. Thus measuring the actual inventory levels will provide a useful picture of system efficiency.

Resource utilization
A supply chain network uses resources of various kinds: manufacturing resources (machines, material handlers, tools, etc.); storage resources (warehouses, automated storage and retrieval systems); logistics resources (trucks, rail transport, air-cargo carriers, etc.); human resources (labor, scientific and technical personnel); and financial (working capital, stocks, etc.). The objective is to utilize these assets or resources efficiently so as to maximize customer service levels, minimize lead times, and optimize inventory levels.