Supply Chain Metrics Explained
If you run a home business, whether it's your primary source of revenue or your part-time side hustle, you want to make sure that your home business is operating efficiently. Supply chain is here to help. Are your customers getting what they want, when they want it? And is your home business making that happen by spending as little money as possible?
Supply chain metrics can answer those questions for you. But which supply chain metrics can you use to track that information? And how in the world are you going to be able to get access to those metrics and have them make sense? Before you get those very pertinent questions answered, you need to ask yourself how your home business is being treated by your suppliers.
Are your suppliers shipping you what you want? Are you getting those items when you want them? And are you paying as little money as possible to get those items? Finding the answers to those questions - and the underlying data that gives you access to those answers — is a step on the way to using supply chain metrics to monitor your home business' operational efficiency.
On-time delivery means that customers get what they wanted when they want it. And for your home business, you have customers — and you are a customer. And you should be measuring what both sets of on-time delivery.
Corporations, with sacks of money that they use as bean bag chairs in the executive lounges, have all sorts of sophisticated algorithms and over-caffeinated analysts collecting this data for them. So how can your home business collect the same data?
If your home business doesn't have an enterprise resource planning system (an ERP), you can still get this data. If you don't know if you have an ERP, you don't. However, you can create a very simple spreadsheet that will allow you to track the on-time metric.
Your on-time metric spreadsheet should have two tabs (or you can set up two spreadsheets if that's easier for you to manage). For the sake of this explanation, we'll go with the "two tabs" scenario:
- Tab 1 is the "Customer Shipments" tab.
- Tab 2 is the "Supplier Deliveries" tab.
For your Customer Shipments tab, create columns with this information — customer name, order number, promise ship date, and actual ship date. You can also include columns with information like items ordered, quantity ordered and quantity shipped — but by including the order number you should be able to easily cross-reference that info if you need it.
To track on-time delivery, you need to keep track of your promise ship date and your actual date. If you ship it by the promise ship date, that order shipped on-time. If you shipped it after your promise ship date, you shipped that order late.
If you shipped one hundred orders in a month and you shipped one of them one day late, your on-time delivery for that month was 99 percent. An order is either 100 percent on-time or it's 0 percent on-time.
The same holds true for your Supplier Deliveries tab. When did your supplier promise they would ship you your order and when did they actually ship it? It's either 100 percent on-time or 0 percent on-time. And if a supplier ships you ten orders in a month and they shipped one of them one day late, their on-time delivery to you was 90 percent.
Acceptable On-Time Delivery Percentage
Every company should set a goal of 100 percent on-time delivery. But is that realistic? It may not be, but 100 percent should be your goal.
But what's an acceptable on-time delivery percentage? Most companies find 99 percent or 98.5 percent acceptable. You can consider anything below 95 percent a total on-time delivery fail.
Ensuring you have 100 percent inventory accuracy means that you are giving your home business every opportunity to ship your customer what they've ordered.
When you have 100 percent inventory accuracy, you can be assured that when you start to pack up a customer's order — that you actually have the product your customer wanted.
So how do you create the metrics you need to make sure your home business is tracking toward 100 percent inventory accuracy?
Do you know what your home business has in its inventory right now? Is it some ERP system or a spreadsheet or notes on a Post-It that you use to remind you of what you have on-hand?
The first step in developing a useful inventory metric is to conduct a 100% physical inventory. That means going to your warehouse or storage unit or garage or hall closet and counting every item that you have there. Once you feel like your count is accurate, compare it to what your ERP system or spreadsheet or Post-It told you what you thought you had.
That is your initial inventory accuracy metric. If you thought you had 100 items and you had 98 (or 102) items, then your inventory accuracy is 98 percent.
Once you have your baseline inventory figure, you don't need to count everything every day. But you do need to do regular cycle counting.
Identify your key inventory items. These are usually your high-value items or the items that are critical to your home business operating. Some companies do cycle counting every day. Even if you decide your home business doesn't need to cycle count every day, you should develop a regular cycle count schedule or policy.
Your cycle count schedule or policy should include how regular your schedule and which parts you'll count. And the parts you count should rotate. If you have 50 different parts to count, you can count one of those parts every week — so that by the end of the year, you have counted each item at least once.
With each cycle count, you know have an inventory accuracy metric. If your ERP system or spreadsheet or Post-It tells you that you had 100 each of Product A. And then you shipped 10 each of Product A. And your ERP system or spreadsheet or Post-It left you with the understanding that you had 90 each of Product A.
And then you cycle count Product A and you count 89 each of Product A. That leaves you with 98.9 percent inventory accuracy. By the end of the year, when you do your full on physical inventory, you'll have your annual inventory accuracy. But whether you cycle, count every day or every week, you can track your inventory accuracy daily or weekly.
Your home business inventory accuracy is that easy to track. And the inventory accuracy metric should stay above 99 percent. That way, when one of your customers orders Product A, you can look at your ERP or spreadsheet or Post-It and be 99 percent sure that what it says there is what you have on hand.
Cost of Goods Sold Metric
Your home business' cost of goods sold metric isn't as easy to collect as your on-time or inventory accuracy metric, but it's a critical metric to understand.
If you think it costs you $10 to make the item you sell and you sell it for $15, you have a $5 gross margin to work with. But you need to make sure that it really does cost you $10 to make that product. That is your home business' cost of goods sold.
At least once every month or once every quarter, pull out your supplier invoices and other invoices (labor costs, outside service costs) that make up your total cost of goods. Do the math. Does that product still cost you $10 to make?
Your cost of goods metric should be 100 percent. It's the way to keep track of your costs. If your $10 cost starts to creep higher, you need to understand why — and work to get them lower. (Or reach out to your customers about a possible price increase.) But your cost of goods metric is how you know how you're doing.
Supply chain metrics let you know if your home business is delivering what your customers want when they want them, and if you're doing that by spending as little money as possible. Your home business can collect important supply chain metrics by following the steps outlined above.