Supply chain metrics not helping?
Supply chain metrics sometimes don’t help as much as they should.
That’s unfortunate as they form the foundation of the Sales and Operations Planning (S&OP) process.
Supply of supply chain metrics are in endless supply. So what are the key ones that you should be looking at?
Here are six we’ve found most useful.
1. Demand & Forecast Versus Budget
This one is easy. Every month, compare actual demand and remaining forecast for the calendar year to the budget sales volumes for the year.
This enables you to easily see if you are trending above or below budget.
If you see sales and forecast are coming in above budget, then you know you’re probably going to live through a period of expediting operations. If the opposite is true, you might have to ramp down operations at your sites.
This is an easy metric to track, but incredibly valuable.
2. Forecast Error
You decide what forecast error metric is ideal based on your business. But you need a metric that tells you how good (or bad) you are at forecasting.
We all know forecasting is hard (though supply chain planning shouldn’t be). You’re not looking for perfection. But you are looking for patterns and reasons for why the forecast is off.
We tend to like the mean absolute percent error metric using six months of historic performance. This helps smooth out the metric a bit. We don’t want to be overreacting to one-off issues impacting performance. The focus is on high level insights and trends.
Now, overly optimistic or pessimistic forecasting might be a problem for your business. In this case, a forecast bias metric may suit you better.
Also, if you need more detailed insight, you might want to implement a metric where you calculate the percentage of SKUs that are trending above a particular forecast error threshold. You can even weight the SKUs by volume or revenue so that you don’t waste a lot of time investigating stuff that has little impact.
Again, it’s up to you. But you should have a metric to measure your ability to forecast.
3. Forecast Change
Sometimes this is referred to as forecast evolution. You need to compare the previous forecast version to the current forecast version and see how much has changed.
Select a time period and aggregate volume in a common unit of measure for both the previous and current forecasts.
For example, let’s say you’re looking at the forecast for full year 2012. Compare what you said it would be in November 2011 versus the same in October 2011. Big changes month to month are a problem.
Remember, as supply chain leaders you are only as good as the forecast you start with. The more consistent you are with this starting data, the easier it is to plan.
4. Customer Service
Just about every organization has an endorsed customer service metric. If you don’t have one for your organization, you’ll want to start asking why one doesn’t exist. After all, isn’t your supply chain designed to deliver products to your customers?
Like all metrics, the exact flavor is dependent on your business. It’s typically some version of a line fill rate metric.
The actual targets will vary based on your industry. For some, anything less than 100% customer service can lead to disastrous results. For others, the cost of 100% customer service may not be worth it operationally.
5. Inventory Turns
First of all, this metric needs to represent total supply chain inventory turns. Not just the inventory turns at the finished good distribution center.
If that’s all you’re measuring, you’re not getting insight into inventory possibly building upstream in the supply chain.
So let’s say you’re turning your total supply chain inventory twice a year. Your production lead time is four months. And you have two months of buffer inventory. That would indicate that things are probably going OK.
Or let’s say your inventory turns is trending up and your customer service is trending up, then generally speaking, good things are happening.
6. Inventory Write-Offs
It’s a shame anytime you have to scrap inventory. You’re taking money off the balance sheet and throwing it in the trash.
It’s important to treat the corporation’s money as if it were your own. So if you are experiencing significant inventory write-offs, you need to determine the root cause and implement corrective actions.
Perhaps your batch sizes don’t match demand or shelf life. Or perhaps you’ve got excessive quality issues resulting in batch rejections.
Regardless of what you find, all inventory write-offs need to be investigated and avoided if possible.
Track and Revise
These are six metrics that we like to use to measure supply chain performance. We generally find that other metrics tend to contribute to or produce the same insights.
So you may certainly use other metrics that address the same insight on performance. Just understand what the above is trying to measure and use any metrics that capture it appropriately.
Remember there are few absolutes in this profession so you can always start with these and adjust as needed.
Good luck!
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