A classic article in the Supply Chain Management Review discusses the hierarchy of supply chain metrics because measurement is the cornerstone of operational success. According to the article, which builds on AMR Research, the best approach to measurement uses a three-tiered hierarchy that allows managers to quickly assess overall supply chain health at the top level, diagnose problems at the mid-tier, and identify corrective actions at the ground level.
At the top level, there are three core metrics that allow a manager to quickly gauge the overall health of the supply chain:
- Demand Forecast Accuracy
- Perfect Order
- SCM Cost
At the next level, a composite cash-flow metric provides a diagnostic tool that allows a manager to zero in on the components that are likely the cause of any inefficiencies. The metric allows managers to determine whether there’s a balance between the time it takes suppliers and the time it takes customers to pay, whether the inventory metric (which can contribute to high costs) needs further analysis, and whether cash flow is being appropriately managed. The metric consists of:
- Accounts Payable Turnaround Time
- Inventory Totals
- Accounts Receivable Turnaround Time
At the bottom level are the day-to-day metrics that measure performance across the different supply chain management activities and allow root-cause analyses when one of the higher-level metrics indicates a potential problem with efficiency or cost management. These metrics measure supplier effectiveness, operational effectiveness, and cost management effectiveness and include:
- Supplier Quality
- On-Time Delivery
- Remaining Inventory
- Purchasing Costs
- Direct Material Costs
- Production Schedule Variance
- Plant Utilization
- Work-in-Process Inventory
- Order Cycle Time
Utilized properly, the hierarchy can lead to great success. However, companies can face significant challenges when designing and implementing measurement programs. The article offers seven recommendations for tackling the challenges that will arise:
- Follow these four universal principles
- Keep it Balanced
- Work from the Outside In
- Focus on the Outcome
- Use the 80/20 rule and don’t choose too many metrics.
- Proactively address organizational resistance
- Beware of tunnel vision and ensure the metrics you choose address interactions and interdependencies
- Analyze root causes when issues arise
- Use a top-down approach to analysis
- Measure enablers
- Measure in the context of a performance-management program