Various KPI’s are implemented to measure the performance of Supply Chain Managers and Warehouse Managers. The KPI’s that are implemented are intended to drive the behaviour of the supply chain.
But do they?
Reduce Inventory Levels
Productivity KPI’s are designed to drive behaviour to manage supply chain costs. We measure performance with things like Cost of Goods Sold (CoGS) (Kenton, 2017), Total Supply Chain Management Cost (APQC (American Productivity & Quality Center) , n.d.), and Cash-to-Cash Cycle Time (Zigu, 2015).
A reduction in inventory levels will reduce CoGS (less inventory, less costs), Total Supply Chain Management Cost (less inventory, less costs), and Cash-to-Cash Cycle Time (less inventory, shorter time to receive revenue for inventory). So, by reducing inventory levels supply chain costs are reduced.
Increase Inventory Levels
Service level KPI’s are designed to drive behaviour to ensure a reliable, responsive and agile supply chain. We measure things like Perfect Order Fulfilment (Dwyer, 2008), Order Fulfilment Cycle Time (Marr, 2012), and Supply Chain Adaptability (Anon., 2014). How can these KPI’s be improved?
An increase in inventory levels will positively impact Perfect Order Fulfilment (more inventory, more availability), Order Fulfilment Cycle Time (more inventory, shorter lead time), and Supply Chain Adaptability (more inventory, less fragile). By increasing inventory levels reliability, responsiveness and agility can be improved.
Spot The Problem
Are these not two conflicting expectations, then? Is it even possible to manage supply chain costs, reliability, responsiveness, and agility?
Currently the way they attempt to achieve both is to make decisions based on forecasts. Forecasting attempts to predict future events based on historic events, combined with management experience. Teams of planners are employed with high-end software solutions to attempt making more accurate forecasts.
Are the forecasts ever right? Every item that goes on sale due to an abundance of stock or that is not available when a customer desires it is a forecast failure.
Find a REAL Supply Chain & Logistics Solution
Using a type of forecast, the “starting” inventory levels are determined. Thereafter, the supply chain becomes reactive, within the granularity of a day, to what is happening not what we predicted will happen. The reactiveness of the supply chain enables the supply chain management to continuously improve – making the supply chain more and more profitable. The short feedback loops implemented allow for quick and informed decision-making and allow SCM’s and WM’s to focus their limited management attention on exceptions.Wondering if this is really true?
Manage Better for Better Results
Supply Chain Managers and Warehouse Managers need to make informed decisions daily, these decisions ultimately need to serve the main goal of the system they manage – to be profitable. The goal of the system has two main drivers – productivity and service levels.
OpsLogik has over 20 years’ experience in implementing strategies to improve supply chain management performance. These strategies have been implemented in various industries.
Contact Konrad Bartel today to find out more about how we can help your company get ahead and stay ahead of your competitors.