It’s a well-known axiom that an organization’s success or failure rides on the effectiveness of its supply chain. Companies spend a great deal of time tweaking their supply chains to improve efficiency and visibility while attempting to minimize cost and risk. Even so, few companies know how to simply measure their success.
The following four key metrics tell the performance story when it comes to supply chain effectiveness.
- Procurement Cost per Order: The total cost of all business functions involved in procurement orders, including planning, purchasing, inventory control, traffic, receiving, incoming inspection and salvage.
- Time to Market: The actual elapsed time from design to launch of a product.
- Transportation Efficiency: A comparison of budget vs actual costs for all transportation costs.
- Warehouse Efficiency: A comparison of actual labor vs standard labor for warehouse tasks, or the actual number of units vs standard units.
How to Measure Supply Chain Effectiveness with Key Metrics
As outlined below, each of these key metrics clarify a specific aspect of supply chain effectiveness.
Procurement Cost per Order
Procurement cost per order measures the efficiency of the total procurement process. To calculate this key metric, add up all the costs of the business functions related to procurement and divide by the total number of purchase orders (POs) created over the same period. While this sounds like a simple equation, gathering the costs is more complex than it might seem at first.
The costs include the cost of procurement planning, which in some cases may include costs associated with the material requirements planning (MRP) or supply chain systems. Either the total system costs must be allocated across functions or the planning function must be isolated or eliminated. Many companies choose to eliminate it, though obviously, the results are more accurate if it’s included. Costs must also include all purchasing and inventory control costs along with the costs of incoming inspections and receiving. The number of purchase orders issued is usually easily calculated by tracking the PO numbers issued by the business system. QAD Channel Islands Action Centers (Embedded Analytics) can help with the tracking of POs and any associated costs.
Some ways to reduce the procurement costs include vendor managed inventory (VMI), electronic orders and change orders, as well as excellent supplier communication.
Time to Market
The first product to market often gathers the greatest market share, and this advantage tends to stay with the product through its entire product life cycle. To calculate the time to market, it is necessary to capture the elapsed time from the start of the design cycle until the first item ships to customers or distribution centers.
Project planning and control is the key to this metric. Calculate time to market as the ratio between actual elapsed days and the planned elapsed days. To ensure this metric is meaningful, the project planning phase must be carefully set up to prevent stakeholders from adding slop time to the steps. While it’s important to make the estimates reasonable and attainable, the attainability should not override the urgency of hitting the market in advance of competitors.
Using lean and agile techniques in manufacturing can help make this metric more attainable. Look for production methods that enable rapid changeovers and ways to eliminate steps or wait time that can extend lead time. Using a system such as QAD Cloud QMS can help ensure that engineering change notices (ECNs) are quickly and accurately incorporated as needed.
Sometimes companies compensate for late production or slow time to market by using faster than planned transportation methods such as air freight vs truck or rail. While at times this can be unavoidable, it has an adverse effect on profitability.
Always start with a budget. Then use the QAD Cloud ERP solution to accumulate actual freight charges. Divide the actual costs by the budgeted cost to determine the waste, if any. Companies can help control this by using a transportation management system such as QAD Transportation Management System (TMS) to consolidate shipments or optimize routes.
Depending on the company’s preference, warehouse efficiency may be calculated in hours or units. To calculate this metric in hours, divide expected standard hours (or units) by actual labor hours (or units). Just as when calculating manufacturing efficiency, the answer will most likely be less than one.
Depending on how accurate the standards are, results between 70 percent and 100 percent may be considered good. Since achieving 100 percent efficiency is unlikely, anything over 100 should be suspect. Either the standards are wrong, or some actuals are missing from the calculation.
Warehouse efficiency may be improved by implementing wave picking or cross-docking. Using barcodes, as in QAD Automation Solutions, will increase accuracy as well as efficiency.
Best Practices for Improving Supply Chain Effectiveness
In addition to the tips outlined above, consider the following best practices:
- Improve location assignments in the warehouse to reduce steps by storing frequently used items near the front.
- Work with suppliers to improve communication and reduce the need for frequent POs by using blanket orders and vendor managed inventory.
- Use electronic data interchange (EDI) or other electronic order methods for POs.
- Negotiate favorable rates with carriers and consolidate shipments whenever possible. If feasible, strive for full truckload (FTL) shipments to reduce freight costs.
- Look for global sources so that supply is close to the source of demand, minimizing the distance freight must move.
- Use lean, agile operational techniques to eliminate waste and non-value-added steps and to find ways to reduce changeover time.
Which Metrics to Use?
Companies should be wary of using too many metrics because they can confuse the team. Also, since metrics often have inverse relationships, focusing on opposing metrics can make it hard to understand priorities and make decisions.
If you’re looking to increase supply chain effectiveness, start with solid measurements of existing performance and focus on one area at a time. Make small changes and measure the results before introducing additional changes. Otherwise, it can be too difficult to tell which changes produced desirable results.
What challenges are you finding most difficult when it comes to supply chain effectiveness? Let us know in the comments section below.