Supply Chain Metrics and KPI's - Part 1

Hello and thank you for tuning in. As promised, I will for the next few weeks elaborate on some Supply Chain (Key Performance Indicator) KPI’s and Metrics.

A KPI allows you to measure your performance over a period of time. A very common KPI is your pulse. Almost every time you go to the doctor, he/she will check your pulse and then decide if there is cause for concern. A Supply Chain KPI’s if used correctly can have the same effect and be the source of some very interesting insight.

I recently wrote an article for MEXA for which I would like to thank Danielle Wong. I received a copy of the magazine last week and have to admit that those guys are doing a fabulous job promoting the importance of Logistics and Supply Chain Management in Mauritius. It was interesting to see so many contributors with so much knowledge to share.

Reading through the magazine also made me realize that many of us are still very focused on the external aspects of SCM and Logistics. We are and rightly so, very concerned about road infrastructure, port infrastructure and national information technology capabilities however we are failing to see the more important aspect of the subject which is company logistics and SCM. This aspect is one that we can directly influence unlike government policy and big capital expenditure projects. Focus on company logistics and SCM can deliver great competitive advantage if properly managed.

Please remember that everyone will enjoy the same external benefits. If the port is more efficiently run or if the road network is upgraded, while it is helping your company against international competition, it is not providing you with a competitive advantage against your local competitor. When you deploy a successful SCM strategy or any other internal strategies for that matter, it is contained within the four walls of your organization and cannot be copied by your competitors thus giving you true competitive advantage. I strongly recommend that at the same time of thinking of SCM at a national level that you also think of it as tangible company specific strategy.

Back to our topic of the day – Supply Chain KPI’s and metrics. I will offer several KPI’s over the next few weeks. They will be categorized in the below SCM functions.

• Logistics KPI’s
• Procurement and Supplier Management KPI’s
• Inventory Management and Forecasting KPI’s
• Warehouse / DC KPI’s
• Transport KPI’s
•  Customer Service KPI’s

Today’s KPI is Total Supply Chain Cost. It is the most important and relevant KPI to any Supply Chain. If you can understand your Total Supply Chain cost, which is a mind-numbing task in itself, you can understand it as a % of gross profit or COGS or turnover. This then allows you to set a target to reduce your total supply chain cost %. I will constantly refer back to the “Supply Chain Blueprint” table which I posted in the “Innovate your Supply Chain – The Mauritian CEO’s perspective” because it gives a fairly detailed picture of what activities and processes belong to the supply chain. If you also refer to that table we can deduce that 

Total supply chain cost = Cost of sourcing and procurement (Not Cost of Goods) + Supplier Quality Cost + Cost of Planning (demand planning and forecasting) + Cost of all transportation (inwards and outwards, sea, air, rail and road) + Cost of Storage and Warehousing + Cost of Carrying Inventory + Cost of Inventory Obsolescence + Opportunity cost of Inventory + Cost of Supply Chain Related Technology

Place you company performance on the below diagram and set short medium and long term goals as to where you want to see it. The work tirelessly towards achieving this goal. 

All of the above are cost centers and if your organization practices Activity Based Costing, these figures could be accessible. If this is too big a task to accomplish right now you can start by breaking this down a bit further and concentrating on the Logistics cost part of the business only. Because it is debatable as to what belongs to Logistics (I see Inventory Management as a Logistics discipline while other can see it as a merchandise function), start by focusing on Transportation and Warehousing costs only and see what that costs you.

I assure you that as soon as you start putting perspective to these very important metrics, insights that were previously obscure to you, will be a lot more forthcoming.

Next week I will focus on Inventory KPI’s. Please stay tuned.

Regards

Girish