When a company wants to look at the performance of its supply chain, there are a great many metrics that can be used. Each supply chain performance metric gives a slightly different view of a piece of the supply chain. The important decision for any company is to prioritize which supply chain metrics are important and how they will be used. Many companies use supply chain performance metrics that are easy to calculate but may not necessarily give a true indication of how the supply chain is performing. Some companies use a range of metrics that they require their logistics department to adhere to, but do not realize that in doing so, other parts of the supply chain may be negatively impacted.
Characteristics of a Good Performance Metric
When companies look at the various performance metrics that are available, there are a number of characteristics that they should look for when selecting metrics that will help with their business decisions.
- Easy To Understand - A good metric is one that can easily be understood by anyone that looks at it. It should be clear as to what the metric is actually measuring and how it is actually derived.
- Quantitive - An important characteristic for a supply chain performance metric is that it is expressed by a value that is objective, i.e. derived from real data and not subjective.
- Measures What is Important - Some metrics can look to be important, but when the data is analyzed, the relevance of the metric can be tenuous. It is vital that a performance metric on which business decisions are made should measure important data.
- Causes Correct Behavior - A good performance metric should be one that makes the user take the correct action. For example, if a metric shows a number of orders processed per day, then the correct action increases the number processed. However, sometimes the metric by itself can cause the user to take action but at the determent of other areas. For example, if the metric is to measure the warehouse staff by the number of movements per day, they can increase the number of movements at the determent of the number of trucks loaded and a number of orders processed.
- Metrics Should be Easy To Collect - Sometimes companies select complex performance metrics that are very time-consuming to collect and may require time to be taken away from line staff to prepare. This is counterproductive and these types of metrics should be avoided.
Categories of Performance Metrics
There are three main categories of supply chain performance metrics; time, cost and quality.
- Time - When companies look at selecting supply chain performance metrics, they usually will examine those metrics that relate to time, as they are easily calculated, easily understood, and clearly show operational effectiveness. For example, companies will look at metrics that show the level of on-time deliveries, on-time receipts, time to process purchase orders, and time to fulfill an order.
- Cost - This is an important performance metric as it shows how efficient parts of the company is. Businesses need to make a profit and by focusing on cost metrics, they can identify where in the business the improvements can be made. Inventory carrying costs is a popular performance metric that companies look at to see how much it costs them to carry items in the warehouse. Companies are always trying to identify where they can make changes to improve cash flow and making the business more profitable.
- Quality - For companies that want to improve customer satisfaction, the performance metrics focused on quality are vitally important. Although the metrics around delivery times are important to customer service, improvements in the quality of the product can significantly improve customer satisfaction.