Why It’s Imperative That You Set KPI’s To Measure Your Supply Chain

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There is an old saying in quality terms: That which cannot be measured, cannot be improved’ and despite its longevity, it is a saying that still rings true today. You do need to be able to measure your supply chain in order to ensure that you can make some improvements and think about it; if you don’t measure your supply chain and all your competitors do just that, then who is going to be left behind?

But Why KPIs?

KPIs are Key Performance Indicators and they are actually a set of metrics that can be used to measure business performance, growth and productivity. KPIs are a good way to measure performance within the supply chain because they are objective and they form a good overall view of how well an organisation is, or conversely is not, performing.

What Is A KPI?

A KPI is an advanced metric. A metric is a way of measuring and assessing the performance of any business activity, but a KPI has an inherent strategic value, so it is a little like a structure; first you have the metrics, then you have strategic metrics, which are in reality KPIs.

A good KPI is an objective tool with which to measure your organisation. Your organisation cannot hide from a true KPI, but remember that the KPI has to have a specific strategic value, it is not simply a metric.

In a sense the name sums up what should be looked for. A KPI has to be key when it is of fundamental and strategic importance to the company and is in essence. So a metric to measure how long it takes to deal with incoming post is a metric, it cannot be a KPI, because it is not a ‘make or break’ aspect of the company.

Next the indicator has to be about Performance. Although we all think that we know what performance means, this has to be clarified; performance is something that can be influenced by the organisation. The price of steel on the international market cannot be influenced by that organisation, so it is not a KPI.

The KPI is indeed a KPI if it can provide information on the likely future performance of a company. That is to say that it needs to be able to influence future activity not merely be a case of recording past or historical activity.

How KPIs help

KPIs are, as we have seen, objective, strategic, relate to performance and are likely to influence future activity, so they are a very important tool for an organisation to use. Metrics are useful, but you can use metrics to measure anything, so they are not strategic and what you really want to measure is the strategic performance of the company.

The objectivity of the KPIs is also important. We have all seen statistics and we have all seen the way that the statistics can be interpreted to suit whoever is quoting the statistic. But with a KPI, there is nowhere to run and nowhere to hide; because they are strategic and because they present raw data, they cannot be slanted, misrepresented or even falsified to suit the needs of the person presenting them. So there is very much an emphasis on the objective nature of the performance and this can be of enormous benefit to companies.
In effect, without using KPIs there is always a danger that you are looking in the wrong place and are not looking at statistics that are of strategic importance and you could even be looking at statistics that have been subjectively misrepresented; and that is a scary thought indeed!

Measuring Purchasing Performance

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The old saying is that you can’t manage what you don’t know. Performance Indicators for any business are critical in evaluating success and highlighting key issues, that need addressing, within the company.

One of the major problems is that there are so many things to measure, indeed you can argue that in supply chain they are virtually limitless. The key trick is ensuring that what you measure is a key determinant in the success of your business (and preferably directly linked to your business strategy and targets). This can take time to both decide upon and also to gather meaningful data.

Once you’ve have agreed upon your measures you can distil this even further to a RAG – Red Amber Green traffic light report system or reporting dashboard to ensure that you measure by exception, focus on what’s going wrong in the business and how you can address it.

The Role of QCD in supply chain

QCD stands for Quality Cost and Delivery and represents the holy trinity of measures. QCD, common in manufacturing, can not only help improve things internally but improving the results of these measures can also influence customer satisfaction.

Quality

Quality is often measured in terms of rejected goods or defects – for example if a supplier delivered 100 items on time in the month then great! But if the quality was poor and only 20 of them were usable then not so great. Many organizations will choose to employ a DPPM score (Defective Parts per Million) or simply calculate quality as a percentage of overall deliveries as a not right first time (NRFT) ratio.

Cost

Cost can be measured in a variety of ways from the cost of the part i.e. monitoring the cost trend of a given commodity over time through to measuring productivity and transactional costs. It’s often argued that productivity is a difficult nut to crack as the actual time taken to raise a purchase order might be minimal compared to the time taken to source the supplier or provide key technical information. However it’s worth persevering as understanding your transactional cost can drive key changes in your processes and organization behaviour.

Delivery

Delivery Schedule Adherence (DSA) is one of the most common supply chain metrics. It specifically measures “did the item you ordered get delivered on the day/time it was supposed to be delivered on in exactly the right quantity”. Some organizations accept a tolerance threshold – for example seven days early or seven days late. For other organizations (and automotive is a good example here) it can be measured at a more granular level.

DSA can have a direct impact on customer satisfaction as where suppliers deliver late – this can impact the manufacturing process which in turn can affect when the items can be shipped.