When did you last check your Supply Chain ‘vital’ signs?
I started the New Year off with a Health Check, as I usually do.
Not for my Supply Chain, but my personal Health. It must be an age thing….
But it got me thinking about Health Checks for your Supply Chain.
I was escorted around the Hospital to give blood and ‘other’ samples and presented to the various specialists to be scanned and X Rayed and even ran on a treadmill wired up to a heart monitor.
They checked everything!
Which is just as well, as there were a couple of potential problems lurking, that if left unchecked might have had rather negative consequences.
It’s a pity that we don’t take as much care of our Supply Chains!
Many organisations don’t.
Maybe because they’re totally unaware of those potential problems lurking just beneath the surface. What we can’t see, we tend not to worry about. Its human nature isn’t it?
So as I was laying there hooked up to an EKG machine, I thought to myself, if this was your Supply Chain lying on the table, what should you be checking?
It’s relatively easy to come up with a very long list, but I wanted to come up with a shortlist. One that would help you determine very quickly if you had any Supply Chain problems or not. In effect, the ‘vital signs’ for your Supply Chain. So this is much harder, because there are loads of Supply Chain KPIs and metrics I could suggest.
But here goes. Your Supply Chain ‘Vital’ Signs
ONE – Total Supply Chain Cost as a % of Sales
This is a really important metric that should be used in two ways.
Internally. So that you can track your performance over time, and if possible, between different parts of your organisation.
Different divisions or countries for example.
Externally. If you are a member of a Benchmarking program, you should be tracking your performance against similar organisations. It’s vital to understand how your performance stacks up against others in your industry. You could be fooling yourself that your performance is good, when in fact everyone else in your industry is doing much better.
For this metric, Gross sales is defined as the total invoice value of sales before deducting Sales Discounts, Sales Returns, and Sales Allowances. And total cost should include: purchasing function costs (not COGS), inventory management costs, cost of holding inventory (cost of capital), warehousing costs, transport costs and customer service costs.
Obviously the actual figure will differ across industries, but as examples, to be in the ‘top’ is needed 20% of performers in your industry, you would want these costs to be under:
6% for suppliers to retail.
5% for pharmaceutical companies
8% for frozen and chilled food suppliers
If your figure seems high, you then need to investigate each of the major cost components, and check each of those metrics, to see where the main issues are. It’s likely to be in more than one functional area.
TWO – Finished Goods Stock Turns
What is your overall average annual stock turn for product sold (issued) to customers (finished goods)?
Calculation: Annual cost of goods sold figure divided by the average month end finished goods inventory value (stockholding).
For supply operations this includes spares (include insurance spares) and general (consumables) items.
Again here are some examples that you should be aiming for, to be in the top 20% of your industry.
37 for ambient food and beverage products
16 for Industrial suppliers. (below 6 you are in big trouble)
If your figures here are poor, you’ll need to investigate the underlying causes such as slow moving stock, long supply lead times, poor supplier reliability and poor forecasting accuracy.
THREE – Supplier Performance (Supply In Full On Time – SIFOT)
This one is often overlooked, but it’s fundamental to getting your Supply Chain running effectively.
What percentage of your supplier deliveries is delivered in full (ie. number of orders, lines, or units delivered in full as a percentage of what was ordered)?
Note: For an order covering 10 units each for 10 lines. If for 5 lines you were supplied 9 units of the 10 ordered, and for the other 5 lines we received all 10 units ordered, then – Units = 95 of 100 = 95%, lines = 5 of 10 = 50%, and order = Nil of 1 = 0%.
Depending on your industry you’ll certainly want to be aiming for above 95% here.
FOUR – Delivery Performance (DIFOT by Line – Delivery In Full On Time)
Your in full LINE fill rate, is the supply of what was ordered in full by lines. Two lines (3 units short, 2 units from one line and 1 unit from the other line) not supplied in full from an order of 10 lines (100 units) = 80% [8/10] service level.
The top 20% performance figure varies quite a lot across industries. As you can imagine, healthcare is a high target and also retail.
‘Good’ figures therefore range from 92% to 96% depending on the industry.
If your figures here are low, have a look at the things that ‘contribute’ to the poor performance. Inventory availability is a key one, along with warehouse picking accuracy and closely linked to that, Inventory Record Accuracy (IRA).
And here are a couple more things to look at….
How many times on average is product handled within your warehouse / distribution centre from time of receipt to despatch?
If the process was to:
- unload from truck,
- load onto trailer
then the answer would be 4 times.
If you have more than 5 or 6 touches, you have a problem. Excess handling just reduces productivity, increase costs and causes more product damage.
Customer Service Policy – Have you got one?
Do you have a current documented formal customer service policy which details objectives and performance targets?
If not, this could be the root cause of mis-alignment of service expectations and lots of costly expediting.
It needs to cover aspects such as delivery lead time (from time of order placement), when and what freight charges apply and of course minimum order sizes.
Thankfully I got the all clear for my Health Check this week.
But how did your Supply Chain stack up?
If there is one piece of advice I give to all our consulting clients, it’s don’t go overboard on KPIs. I have seen KPI ‘decks’ the size of Pizza Boxes! Less is more when it comes to KPIs.
At a high level, I reckon six should be adequate. You can always dig deeper if something looks a bit odd or off target.[/box]
Remember what the K in KPI stands for!
My thanks to our Supply Chain Benchmarkingteam for supplying some of the definitions and targets for the above KPIs.
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