November 28, 2022 | Supply Chain Strategy
Supply chains are complex, dynamic entities. They’re also frequently changing. Businesses should pay careful attention to metrics so they can quickly recognize changes in their supply chain and respond appropriately.
With an increasing number of manufacturers outsourcing production to third-party suppliers, the transparency in supply chains has declined. As a result, it’s imperative that businesses monitor their performance to ensure that they can identify risks before they threaten the viability of their business or break planned processes.
While monitoring, you don’t have time for broad generalizations about how things are going — you need specific details about how each part of your supply chain measures up right now. The only way to get that information is by monitoring the right metrics. Read on to find out more.
Businesses can use supply chain metrics to measure performance in different areas — from sourcing to shipping and delivery. All metrics fall into one of three categories: timing, quantity, or cost. Timing metrics include lead time, cycle time, and travel time. Quantity metrics include inventory turnover and inventory on hand. Cost metrics include the cost of lost sales and the cost of quality.
Inventory turnover is one of the most basic metrics you can track. It measures the average amount of time it takes to sell the products in your inventory, from the time when you sell the product until when you order a replacement. The formula for inventory turnover is Cost of Goods Sold divided by the average inventory. You can calculate the average inventory by adding the beginning inventory to the ending inventory and dividing the sum by two.
You can track inventory turnover at both the product and category levels. Tracking it at the product level lets you know how quickly you’re selling specific products. Tracking it at the category level lets you know how quickly you’re selling products in general. Inventory turnover is a good metric to monitor because it gives you a sense of how quickly you’ll need to replenish product on the shelf.
Demand forecasting refers to the process of estimating and tracking anticipated demand for products. This includes considerations like seasonality, the current economic situation, sales trends, and other factors. It’s an essential function for businesses that receive a lot of orders from customers.
Demand forecasting helps measure the percentage of orders for which the business correctly predicted the demand. It’s a good metric to track because it indicates how accurately you’re estimating sales. The more accurate your demand forecasting is, the faster you can get new stock out to customers and the fewer sales you lose because of backorders.
Lead time is the amount of time it takes to move an item from the point of order to the point when the item arrives at your warehouse. It includes the time it takes to source the product, the time it takes to make the product, and the time it takes to ship the product to you. Lead time is one of the most important supply chain metrics because it drives customer satisfaction.
Customers like to know that they can get a product quickly when they order it. If they think that your lead time is too long, they may look elsewhere for that product. A good rule of thumb is to keep your lead time below the length of a typical customer decision cycle. If you have a lot of products with a long lead time, you’ll want to prioritize streamlining the process to reduce the time products spend in transit.
Outsourcing refers to the practice of delegating some or all of a company’s production to a vendor. It’s a common business practice, but it can become problematic if you don’t have the metrics to ensure that the outsourced production is up to the standard you expect. Many businesses use a metric called the outsourcing confidence index to measure their outsourcing confidence.
The outsourcing confidence index is the percentage of production that comes from vendors compared to the percentage that the business manages in-house. The outsourcing confidence index is one metric you can track to ensure that you’re getting the outsourced production quality you need. You can use it to track outsourcing to vendors who produce parts for your finished goods as well as vendors who produce parts for your inventory.
Vendor risk management helps you assess the risk of a vendor failure. If you outsource production to a vendor, you may be at risk of a vendor failure — when the vendor goes out of business or fails to deliver products to the level of quality you expect. You can use a variety of metrics to measure your vendor risk management, including the vendor’s financial health, the number of complaints against the vendor, and the vendor’s compliance with your industry standards.
Vendor risk management is particularly important when you outsource production to a vendor who manufactures components or raw materials that you sell to customers. If the vendor goes bankrupt and stops producing those components or raw materials, you may have to find new vendors quickly — which can be difficult, especially if the vendor failed because of financial issues.
Supply chain metrics are an essential part of keeping track of your business. From inventory turnover to outsourcing confidence, there are a variety of metrics that can help you improve your supply chain.
The business of supply chain management is complex and dynamic. It’s made up of many interlocking pieces, each with its own range of inputs, outputs, best practices and challenges. Monitoring supply chain performance helps you understand how various metrics and KPIs impact your company’s bottom line.
We have compiled a list of essential supply chain metrics every business should monitor to improve your company’s performance and track its progress. Knowing what these stats mean and how they impact your business will help you optimize your supply chain performance so you can see a positive ROI on any strategic investment you make in this area.
Supply chains are complex, dynamic entities. They’re also frequently changing. Businesses should pay careful attention to metrics so they can quickly recognize changes in their supply chain and respond appropriately. If your business has a supply chain, you need to monitor key performance indicators every day. These are the numbers that tell you if your operations are going well or if some part of your supply chain needs improvement.
You don’t have time for broad generalizations about how things are going — you need specific details about how each part of your supply chain measures up right now. The only way to get that information is by monitoring the right metrics.