Rethinking Supply Chain KPIs (3)

This is part three of a series in which I am setting forth some typical KPIs (Key Performance Indicators) used to measure purchasing and supply chain performance in some organizations along with my opinions related to each KPI.

Value of orders overdue divided by the average daily value of purchases

It seems unclear to me whether the intent of this metric is to measure the performance of purchasing and supply chain management or the performance of the vendors themselves. In fact, this metric might have some value if it were restated as:

Value of orders overdue
divided by
the average daily value of purchases
per vendor

This metric would then, at least, tell us (on average) how many days behind schedule a particular vendor is in delivering according to promises made for delivery.

But, we need to take a closer look.

• Why do we care how many days overdue any purchases are?
• Are all purchases created equal? Do  some overdue receipts have a dramatic impact on the production of Throughput while others do not delay Throughput at all? Is it also true that not all delayed production has the equal Throughput value? Are some products likely to produce higher Throughput per unit than others ?
• Should we be most concerned with delays to Throughput (cash-flow and profits) and have little concern for delays to production of goods that are not destined for immediate shipment to customers in exchange for cash?

DEFINITION: Throughput = Revenue less Truly Variable Costs (TVCs), where TVCs are defined as only those costs that vary directly with each unit of revenue. Typically, TVCs include raw materials, per-unit labor or outside services, per-unit commissions or other selling costs, and little more. No proportionately allocated costs or expenses should be included in TVCs.

Here is what supply chain managers should really be concerned about and one suggestion as a way to measure it:

How many Throughput-dollars are delayed and for how long?

Since delayed Throughput should be our actual concern,  we should develop a metric based on delayed shipments. And, of course, our metric should recognize that a shipment delayed five or ten days is more of a problem than a shipment delayed only one day.

[Note that the following metric is not original with me. Folks much smarter than I are responsible for its development.]

Throughput Dollar-Days Delayed by Purchases

To calculate this metric, we simply calculate the Throughput value of each delayed shipment time the number of days delayed as in the following example:

-----------------------------------------------
 T-Value         Days Delayed        Extension
-----------------------------------------------
$  3,000               3             $   9,000
  10,000               1                10,000
   4,000               2                 8,000
-----------------------------------------------
Throughput Dollar-Days Delayed       $  27,000
===============================================

In this metric, a lower number is better with the target being zero, of course.

You will also note that a single number encapsulates both dimensions of the problem to be addressed—the time factor as well as the Throughput value factor.

A side-benefit of the table above is that it also automatically provides supply chain managers with a metric by which to prioritize actions. The larger the extended value (T-Value time Days Delayed), the higher the priority in getting the shipment out the door and into the customer’s hands.

Let us know what you think by leaving your comments. We can help you design, develop and implement supply chain metrics that really work for your company—helping your firm make more money tomorrow than you made today.

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