Measuring Supply Chain Performance

Doug Howardelldhowardell@InventoryPerformance.comSupply chain management is really about the management of inventories. Because youcan't manage what you can't measure, to excel at supply chain management you need anexcellent measure of inventory performance.Inventory turns is the defacto measure of inventory performance for most supply chainmanagers but it is not a very useful metric for those who are actually charged withmanaging inventory. Turns is backward looking, based on historic cost of goods sold, so itgives a score after the game is over. Turns doesn't say anything about whether currentinventories are good or bad, or whether they will be needed in the future or not.Furthermore, it is difficult to calculate turns by the way inventories are actually managed: byplanner or buyer, by supplier, by product line, by location, etc.Days of Inventory Outstanding (DIO) is also typically based on historical data, however,some companies use projected sales as the denominator. DIO has the problem of mixingcost and price in the same calculation which introduces other variables into the metric. Bothturns and DIO lump all of the inventories together and don't provide any insights as to whereperformance can be improved.Metrics should reflect what management is trying to accomplish. In managing inventories aneffective performance measurement should be:1. Demand Driven. Whenever possible, inventory levels should be based on what we aregoing to need in the future, not what we used in the past. This is particularly relevant intoday's changing economy.2. Dollar Focused. Senior management measures inventory performance in dollars. Yetall of our inventory management tools like ERP are planning part quantities. Managementdoes not care how many pieces are in the storeroom -- they care about how many dollarsare tied up in inventory.3. Segmented. Different types of inventory should have different target objectives:production inventory vs. finished goods vs. spare parts. Certainly, disparate commoditieslike forgings and fasteners should not be lumped together or measured by the samecriteria.4. Efficient. Not all inventories should be managed with the same level of effort. DynamicA-B-C analyses will identify the big dollar movers for tighter management and which Citems to put on auto-replenishment with different rules.5. Accountable. Whether planners, buyers, product managers or supply chain managers,each participant should have their inventory performance measured and tracked over time to show improvement.One approach, the Inventory Quality Ratio (IQR) which is described in detail atwww.InventoryPerformance.com, combines the above principles in a simple technique for measuring inventory performance and managing inventory dollars. The IQR logic wasdeveloped by the materials managers of 35 companies and was used by them to reduceexcess inventories $500 million while improving on-time deliveries. It is now being used byover 3,000 planners, buyers and supply chain managers in manufacturing and distributioncompanies worldwide to reduce inventories an average of 25%, most of it in the first in six tonine months.