As a New Year and a new decade begins, many executives have made resolutions with the hopes of improving their businesses. One vital resolution is to better measure the performance of various departments and function, including the supply chain. But, like the unrealistic diet or exercise plan, supply chain managers should be aware that measuring too many components will be burdensome and eventually abandoned.
While it’s understood that measuring performance against key performance indicators (KPIs) is vital in reaching strategic and tactical goals in the short- and long-term, it raises the question: Which KPIs should be tracked? One manufacturing association identified 28 supply chain and manufacturing performance indicators to be tracked; but the reality is that most companies have trouble tracking more than two or three, let alone more than two dozen.
That’s why it’s better to take a more realistic approach. Here are the Top 6 metrics that can be automated to at least some extent through the use of enterprise resource planning (ERP) or materials resource planning (MRP) software.
· Inventory turnover control, as calculated by the number of days materials haven’t moved from warehouse storage to production. Extra inventory ties up valuable financial and real estate resources as manufacturers want to use their space for production, not for storing extra materials and components. The higher inventory turnover rate is, the more efficiently supply chain is built. The number of days varies by industry and manufacturer-specific needs, but as the general rule, turnover should be 30 days or less.
· Downtime in proportion to operating time, as calculated as the ratio between the time production and supply chain lines are stopped and time they operate. This ratio is a direct indicator of asset availability for production. The lower the number, the more efficiently manufacturing equipment is used. A ratio of 0.5 indicates production lines were stopped half of the time.
· Productivity in revenue per employee, as calculated by dividing all generated revenue by the number of all employees. This can be examined on several levels: on a company level, on a department level and even production line level. Revenue per employee shows areas with the lowest and biggest ROI.
· On-time supply, as calculated as the difference between orders delivered on time vs. delivered late, then divided by the number of total orders. Tracking this KPI helps to understand whether the supplier is reliable or not.
· On-time delivery, as calculated by the manufacturer’s ability to deliver shipments on time vs. late. Even if a manufacturer isn’t tracking their suppliers’ ability to deliver materials on time, this KPI may indicate a need to do so. It may also identify possible issues in customer logistics. For many, this is the most important KPI because it speaks to customer satisfaction and can directly affect the bottom line.
· Incoming material quality can be calculated by the amount of time or money spent repairing product because of the quality of materials used in the end product. If the quality of materials supplied is low, repairs increase, creating an extra cost to the manufacturer. This can be examined in different ways: by supplier; by product category; as a percentage of faulty materials vs. good materials.
Obviously, it’s not enough just to track KPIs; there needs to be follow-up components. Armed with performance reports, companies can identify the best practices that allowed benchmarks to be surpassed as well as pinpoint the causes for sub-par performance, and take appropriate remedies. For the supply chain executive, ERP and MRP software is much like a fitness app for the individual who has resolved to exercise more. It’s a vital tool for tracking and measuring supply chain metrics, and shows whether the operation is developing in the right direction. Like all new year’s resolutions, though, the software tools when used regularly in conjunction with an ongoing effort, are an investment that proves useful to a company’s long-term health.
