CHAPTER 5

Metrics for Measuring Supply Chain Performance

After reading this chapter you will be
able to
Employ a useful model for assessing markets
and the supply chains that support them
Define a concise set of metrics for measuring
the performance of a company’s supply
chain operations
Discuss ways to collect and display supply
chain performance data
Use performance data to spotlight problems
and opportunity
Useful Model of Markets and Their
Supply Chains
A supply chain exists to support the market that
it serves.
To identify the performance that a supply chain
should deliver, we need to evaluate the market
being served.
Let us start by defining a market using its two
most basic components—supply and demand.
A market is characterized by its combination of
supply and demand. This model defines four
basic kinds of markets, or market quadrants
Market Performance Categories

The companies in a supply chain must be able to work

together to exploit the opportunities available in their
markets. The highest profits go to the companies that
can successfully respond to the opportunities their
markets offer. Companies that are unable to respond
to opportunities as effectively will fall behind.
We will use four measurement categories:
1. Customer Service
2. Internal Efficiency
3. Demand Flexibility
4. Product Development
A Framework for Performance
Measurement
There are other demands that real-world
markets place on their supply chains;
however, by using these four performance
categories we can create a useful
framework.
Customer Service Metrics

In the words of Warren Hausman, a professor at

Stanford University, “Service relates to the ability
to anticipate, capture, and fulfi ll customer demand
with personalized products and on-time delivery”
(Hausman, Warren H., 2000, “Supply Chain
Performance Metrics,” Management Science &
Engineering Department, Stanford University).
There are two sets of customer service metrics,
depending on whether the company or supply
chain is in a build-to-stock (BTS) or build-to-order
(BTO) situation.
 Popular metrics for a build to stock situation are:
 Complete Order Fill Rate and Order Line Item Fill Rate
On-Time Delivery Rate
Value of Total Backorders and Number of Backorders
Frequency and Duration of Backorders
Line Item Return Rate
Popular metrics for a build-to-order situation are:
 Quoted Customer Response Time and On-Time
Completion Rate
On-Time Delivery Rate
Value of Late Orders and Number of Late Orders
Frequency and Duration of Late Orders
Number of Warranty Returns and Repairs
Internal Efficiency Metrics

Some popular measures of internal

efficiency are:
Inventory Value
Inventory Turns
Return on Sales
Cash-to-Cash Cycle Time
Demand Flexibility Metrics

Demand flexibility describes a company’s ability to

be responsive to new demands in the quantity and
range of products and to act quickly.
A company or supply chain needs capabilities in this
area in order to cope with uncertainty in the markets
they serve.
Some measures of flexibility are:
 Activity Cycle Time
Upside Flexibility
Outside Flexibility
Activity Cycle Time
Product Development Metrics

Product development measures a company or a supply

chain’s ability to design, build, and deliver new products to
serve their markets as those markets evolve over time.
Technical innovations, social change, and economic
developments cause a market to change over time.
A supply chain must keep pace with the market it serves or it
will be replaced. The ability to keep pace with an evolving
market can be measured by metrics such as:
• Percentage of total products sold that were introduced in the
last year
• Percentage of total sales from products introduced in the last
year
• Cycle time to develop and deliver a new product
Operations that Enable Supply Chain
Performance
In order for an organization to meet the
performance requirements of the markets
it serves, it must look to measure and
improve its capabilities in the four
categories of supply chain operations:
1. Plan
2. Source
3. Make
4. Deliver
Collecting and Displaying Performance
Data
The business environments we live in are characterized
by shorter product life cycles, mass markets dissolving
into smaller niche markets, and new technology and
distribution channels constantly opening up new
opportunities. The pace of change is both exhilarating
and relentless. A company must keep up. To do this, a
company needs to build a business intelligence (BI)
system that presents data at three levels of detail:
• Strategic—to help top management decide what to do
• Tactical—to help middle management decide how to do
it
• Operational—to help people actually do it