METRICS SELECTION

Basic Objectives
• Monitoring – tracking actual system performance by gathering and analysing data
relevant to business objectives

• Controlling – comparing data to the established standards for performance in order

to adjust and improve the system

• Directing – understanding actual people motivation to work toward company goals

• Metrics must be identified for all departments involved in supporting the supply
chain

• Metrics should cut across functions and organizations along the supply chain
 Basic Objectives
• Company have to choose a reasonable number of metrics related to supply chain
strategy

• Strategic attributes of supply chains: velocity, visibility, variability, collaboration,

trust, flexibility, customer focus, security/risk management, compliance,
environmental excellence

• A selection of metrics tailored to a specific supply chain is needed

How do we select the metrics?

 Metrics Selection Framework
Competitive Basis: Responsive vs Efficient

Measurement Focus: Strategic vs Operational

Measurement Frequency: Diagnostic vs Monitoring

• Selected metrics must be communicated throughout the company and extended

supply chain as well as the benefits of achieving them
CUSTOMER-FOCUSED METRICS
 Operational Metrics
• Basic customer satisfaction principle: if customer expectations are met or exceeded,
the customer will be satisfied

• Customer metrics need to measure what is important for the customer, what they
value and expect
 Operational Metrics
Attribute Metric Definition
The probability of inventory unavailable to
Stockout Frequency
meet demand
Availability Fill Rate Measures the impact of stockouts over time
Orders Shipped Complete All items ordered are available in shipment
Backorders An unfilled order or customer commitment
Response Time to The time (hours,days) needed for customers to
Inquiries receive a response regarding an inquiry made
Whether the response is on target and correct,
Product Response Accuracy
additional follow-up not required
Support
Number of complaints (amount of negative
Customer Complaints feedback) received from customers in a given
time frame
 Operational Metrics
Attribute Metric Definition
Elapsed time from when an order is placed
Speed of Performance
until the product is delivered and ready for use
The time it would take to fill a customer order
Supply Chain Cycle Time
Time to if inventory levels were zero
Deliver How often actual delivery times meet planned
Delivery Consistency
Customer delivery times
Order An ability to accommodate
Flexibility
unexpected/unusual customer requests
An ability to source an out-of-stock item in case
Malfunction Recovery
of equipment/service breakdowns
Repeat Purchases Customer purchase again from the same seller
Overall
Satisfaction Referrals to Potential The number of potential customer names
Customers provided by a previous customer
 Strategic Metrics
• Perfect Order Fulfilment – measures every step of a customer’s experience

• Customer Satisfaction – the best source of customer metrics

✓ Customers have expectations about the quality and predictability of an

experience but they can change over time
✓ Example: if most of your competitors improve their supply chains and customer
experience, even if your metrics are the same; customer satisfaction is likely to
go down because they now have higher expectations
FINANCIAL METRICS
 Profit Metrics
Cost Metrics
Total landed cost
Cost per major SC function
Cost per detailed SC function
Cost per unit
Cost as a % of net sales
Warehouse order processing cost
Inventory carrying cost
Direct labour cost
Inbound and outbound freight cost
Return cost
Service failure cost
Backorder cost
 Multiorganization Metrics
• Supply Chain Total Cost: an aggregation of the costs of all organizations
participating in a given supply chain

Raw material Component

Manufacturer’s Distributor’s Retailer’s
producer’s producer’s
costs costs costs
costs costs

• Suboptimization – a solution to a problem that is best from a narrow point of view

but not from an overall company/supply chain point of view
 Multiorganization Metrics
• Measuring total SC cost and total SC quality together

• Inventory days of supply – the total amount of inventory in the supply chain

• Dwell time – all inventory idle time (nonproductive) in all parts of the supply chain

• Overall delivery effectiveness – fill rate and order-to-receipt response time

• On-shelf-in-stock % - determine customer satisfaction

• Cash-to-cash cycle time: days of supply, accounts payable, accounts receivable

FINANCIAL METRICS
 Organization’s Financial Health Ratios
• Liquidity Ratios – how quickly certain assets can be converted into cash
✓ should be increasing or remaining steady if high enough
✓ example: Quick Ratio = (Current Assets – Inventories) / Current Liabilities
• Activity Ratios – effective use of assets: total, current, inventories
✓ turnover ratio – sales/asset, should be increasing
✓ example: Inventory Turnover = Sales / Average Inventory = $100 / $50 = 2
✓ example: Inventory Days Outstanding = 365/Inventory Turnover = 365 / 2 =
182.5 days, should be decreasing
• Leverage Ratios – how much debt is used to finance the business
✓ example: Current Debt to Equity = Current Liabilities / Equity, should be lower
• Profitability Ratios – various types of return on investment (ROI)
✓ better when higher
✓ example: Net Profit Margin = Net Profit / Net Sales
 Bankruptcy Risk Metric: Z-Score
• A combination of 4 or 5 weighted ratios
• 90 % accuracy in predicting bankruptcy 1 year in the future
• 75 % accuracy in predicting bankruptcy in 2 years time

• Public Company Z-Score

Z − Score
Working Capital Retained Earnings Earnings Before Interest and Taxes
= 1.2 × + 1.4 × + 3.3 ×
Total Assets Total Assets Total Assets
Net Worth Net Sales
+ 0.6 × + (1.0 × )
Total Liability Total Assets
 Bankruptcy Risk Metric: Z-Score
• Private Company Z-Score

Z − Score
Working Capital Retained Earnings
= 6.56 × + 3.36 ×
Total Assets Total Assets
Earnings Before Interest and Taxes Net Worth
+ 6.72 × + 1.05 ×
Total Assets Total Liability
 Z-Score Cutoff Points

Public Company Private Company

Red: bankruptcy risk, do not select, replace < 1.8 < 1.1
Yellow: monitor carefully 1.8 – 3.0 1.1 – 2.6
Green: fiscally stable > 3.0 > 2.6

Customer Creditworthiness
STRATEGIC PROFIT MODEL
 Return on Assets (ROA) = Net Profit Margin x Asset Turnover
• The ratio shows how much profit the company’s assets generate

• Ways to increase ROA

✓ reducing inventory
✓ reducing the cost of goods sold
✓ working with sales to increase sales volume
OPERATIONAL METRICS
 Quality Metrics
• Order entry accuracy
• Information availability
• Information accuracy
• Number of manufacturing defects found by quality control per million units
• Number of manufacturing defects found by customers per million units
• Picking and shipping accuracy
• Document and invoicing accuracy
• Damage frequency in total / by functional area
• Number of returns / warranty returns
• Number of credit claims

• Accuracy metrics – number of times an activity was done correctly to the total
number of times
 Supplier Quality Costs
Supplier Performance Index = (Material Cost + Nonconformance Cost) / Material
Cost

• Nonconformance – rejected materials, delays and failures to provide

accurate/complete information, late deliveries, missing documents, etc

• Index of 1.10 means that prices are actually 10% higher than agreed when all
problems are accounted for
 Productivity Metrics
Productivity – an overall measure of the ability to produce a good or service; the actual
output of production compared to actual input of resources

• Labour productivity in total and by area

• Units shipped per employee
• Units shipped per labour dollar
• Order per salesperson
• Equipment downtime
OPERATIONAL METRICS
 Asset Management Metrics
• Inventory turnover
• Inventory days of supply
• Absolute inventory levels
• Obsolete inventory
• Equipment capacity utilization
• Manufacturing capacity utilization
• Warehouse capacity utilization
 Inventory Turnover
• the number of days that an inventory cycles / turns over during the year

Inventory Turnover = Sales / Average Inventory

• higher inventory turnover result from increasing sales and/or decreasing average
inventory

• Inventory velocity – the speed with which inventory passes through a company or
supply chain at a given point in time as measured by inventory turnover

✓ example: in a bakery, the turnover if bread is close to 365 times per year

✓ example: in most manufacturing plants turnover is between 6 and 26 times per

year
 Inventory Turnover Retail = Sales / Average Inventory at Selling Price

Inventory Turnover Manufacturing = Cost of Goods Sold / Average Inventory at

Cost

Inventory Turnover Commodities = Units Sold / Average Inventory in Units