Rethinking Supply Chain KPIs (4)

We are continuing our series of purchasing and supply chain KPIs (Key Performance Indicators) used by some firms, accompanied by my candid evaluations of them and some recommendations for improvement.

KPI: Value of Purchase Orders Outstanding divided by the Average Daily Value of Purchases (Days’ Purchases Outstanding)

I have mulled on this one for several days, off and on, and for the life of me I cannot figure out what value this KPI might provide.

In fact, I cannot even be certain whether a larger number is better or a smaller number is better.

If I am running a near-zero inventory, but maintain a large volume of open purchases, it may be very good operationally for my firm to have a high number for this KPI.

On the other hand, if I have lots of excess inventory, this number might be a very low number, but that does not mean my firm is actually better off for having minimized this metric.

Perhaps someone can enlighten me on how this KPI provides management insight on timely and effective actions that actually lead to improving Throughput.

KPI: Purchases (by Vendor) divided by Total Purchases as Percent (Vendor Share of Purchases)

I suppose this KPI might reveal a firm’s dependency on a single vendor, and changes over time might suggest increasing or decreasing dependency on a single vendor or a very small number of vendors.

However, in the raw—in the absence of other considerations—the level of vendor dependency cannot be deemed to be either good or bad. In many cases, developing strong relationships with a limited number of intimately connected—even “integrated”—vendors would be highly advantageous over a broadly diversified portfolio of vendors.

KPI: Price Variances divided by Budgeted Purchases as Percent

I can think of a number of variants on this KPI, such as…

1. Price variances divided by Budgeted Purchases by Vendor
2. Price variances divided by Purchase Order price by Vendor
3. Price variances divided by Budgeted Purchases by Product Line
   … and so forth.

But, once again, stated in the raw, these metrics tell management very little.

Here is what is important: When purchase price variances occur, what their impact on Throughput?

Also, consider these questions:

• Were the purchase price variances avoidable—by purchasing in different quantities or different times? (In other words, did we have any opportunity to exercise control over these purchase price variances?)
• If we had been able purchase at our “budgeted cost,” what would the costs have been to our firm in terms of quality (increases in operating expenses), delays (lost or delayed Throughput), shipping costs (increases in operating expenses), or inventory (increases in investment)?

This KPI represents only one dimension of a multi-dimensional puzzle.

We will continue this series soon.

Let us have your thoughts on these matters. We hope this series is thought-provoking (even if it does gore some sacred cows, now and then).