How to Improve and Fulfill Your Supply Chain KPIs

By Israel Rosales on Oct 22, 2015

There is a golden rule in process improvements:

“You can only improve a process if you can measure it.”

If you don’t measure before and after implementing a change in a process, you can’t quantify the impact of the change. That’s why we define our KPIs (Key Performance Indicators) in order to have a set of indicators to focus on. Improving these indicators will direct our business processes towards reaching our improvement goals.

The major KPI for most companies is Profitability, which is revenue divided by the investment of the company, (revenue is the difference between sales and costs).SCM04-02 small

 

How can Supply Chain activities improve profitability for a company?

  • Decreased costs – this is the classic historical objective of Supply Chain Managers; to keep the cost as low as possible, while maintaining or improving the service level for internal or external customers. But it is not the one to focus on any longer.

 

  • Decreased investments – this has become more and more relevant in the last decade, as it’s not just about revenue anymore. The focus has turned to profitability, and getting the most revenue from the smallest investment. Investments are a dividing factor in profitability, so reducing investments will have a bigger effect in profitability than the same reduction in cost.

 

  • Improving sales – Supply Chain hasn’t traditionally focused on adding value, but in the last 10 years there is a trend demanding Supply Chain to become more strategic, add value and increase sales. Supply Chain managers can do this by improving service levels to increase customer satisfaction.

Below you will find a KPI Relationship graph, where we have included some of the KPIs that will affect the three global KPIs that translate into profitability factors:

  • Customer Service => Sales
  • Total Delivered Cost => Costs
  • Supply Chain Investments => Investments

*Keep in mind the graph is just a representation of some of the more important KPIs, but doesn’t cover all the possible and specific KPIs of every industry at all levels.

SCM04-01 small

How can Winshuttle’s Lean Data Management approach help you improve your KPIs?

Customer Service KPIs (KPI value to be increased)

This group is divided in three subgroups:

 

Demand variability: indicators that will measure the variability of the demand

KPI Target Comments
Forecast Error Decrease
  • Errors in forecast could indicate production is not ready to produce as many units as the market demands
  • Most of the errors in the forecasting are based on incorrect information and data that will lead the organization to the wrong decision
Lead Times Decrease
  • customers and future sales are lost based on not reaching the agreed lead times. This is a critical KPI!
Inventory Decrease
  • Inventory often hides other inefficiencies. The inventory level should be kept to a minimum that allows the company to run the operations without issues (easier said than done).
  • The more variable the demand, the more inventory that will be needed. All of the implications in cost and investments will effect profitability.

 

Supply Variability: these KPIs reflect the variability of supply from vendors

KPI Target Comments
Inventory Decrease
  • Inventory is affected by supply variability. The higher the supply variability, the more inventory a company will need to cover that variability.
Conformance to Lead Times Increase
  • If the lead times of the processes are not regularly met, you risk an impact to the business. Many try to cover this with higher inventory levels, but this a very bad idea.

 

Performance to plan: measuring the actual execution against the operations plan

KPI Target Comments
Adherence to Distribution Schedule Increase
  • If the lead times of the processes are not regularly met, you risk impacting the business or trying to cover this with higher inventory levels, which is the wrong idea.

 
Adherence to Procurement Schedule Increase
Adherence to Manufacturing Schedule Increase
Adherence to Transportation Schedule Increase
Adherence to Warehouse Schedule Increase

 

Cost KPIs (KPI value to be decreased)

This group is divided in two subgroups:

 

Inventory: indicators that will measure inventory costs

KPI Target Comments
Demand Variability Decrease
  • Inventory hiding other inefficiencies – the inventory level should be kept to a minimum to allow the company to run operations without issues (easier said than done)
  • The more variable the demand, the more inventory that would be needed, with all the implications in cost, investments and profitability
Supply Variability Decrease
  • Inventory is affected by supply variability; The higher the supply variability, the more inventory a company will need to cover that variability
Record Accuracy Increase
  • Analysts like Gartner and Forrester estimate that on average, 25% of ERP data is inaccurate or wrong. If 25% of our inventory stock is wrong, that means that on average, inventory stocks are 25% higher than expected

 

Operating Costs: KPIs that reflect the cost of the activities of the process

KPI Target Comments
Procurement Costs Decrease
  • A big part of the operational costs are due to reworks, delays and errors
  • If lead times are not regularly met, you risk impacting the business
Transportation Costs Decrease
Warehousing Costs Decrease
Manufacturing Costs Decrease
Distribution Costs Decrease
Machinery Productivity Increase
  • Production down time, unexpected stops,  and reductions in capacity are factors that add additional operational costs
  • What does an error in spare parts stock data mean? Probably that a critical production machine has stopped for hours or days, waiting for a spare part to arrive

 

Investment KPIs (KPI value to be decreased)

This group is divided in three subgroups:

 

Infrastructures: indicators measuring the investments in physical locations

KPI Target Comments
Warehouse Infrastructures Decrease
  • Higher levels of inventory than required means bigger warehouses than required. This results in higher cost (if warehousing is subcontracted) or larger investments
  • Oversized Warehouse investments are alot of working capital in the less liquid form, and a building full of racks and equipment
Production Infrastructures Decrease
  • Is there anything worse than a lack of production capacity? Yes, an oversized production capacity
  • Oversized production capacities are to production what inventory levels are to processes; they hide inefficiencies and stop the company from becoming leaner

 

Inventory: KPIs that reflect the investment of all stock on the shelves of the warehouse

KPI Target Comments
Inventory Decrease
  • Anything worse than inventory as a cost? Yes, inventory as an active; all that stock on the shelves is money not working and generating profit
Record Accuracy Increase
  • As we mentioned before, analysts like Gartner and Forrester estimate that 25% of ERP data is inaccurate or wrong. If 25% of our inventory stock is wrong, that means that on average, inventory stocks are 25% higher than expected

 

Equipment: measuring the investments in machinery, spare parts, tools etc.

KPI Target Comments
Spare Parts Inventory Decrease
  • There is only one thing that is as bad as having more product stock than necessary, and that’s having more spare parts than required. Spare parts for machinery are extremely expensive and having more in the plant maintenance warehouse will only lead to damaged pieces and re-buys with delays
Machinery Useful Life Increase
  • Poor maintenance and a lack of preventive maintenance decreases the life of machinery and industrial equipment; requiring unscheduled investments in new machinery.

Applying Winshuttle’s Lean Data Management to KPIs

Winshuttle allows companies to fulfill these KPIs from two main angles:

  • By improving the quality of ERP data, companies can expect different benefits, such as:
    • Removing a source of errors for forecasting and decisions.
    • Eliminate ERP data errors in spare parts data that could affect production. Only having spare parts that the operations really need, no more, no less.
    • Improvements in Plant Maintenance operations and increasing the useful life of machinery.
  • Streamlining business processes will:
    • Reduce the overall cycle time by removing waste around the process.
    • Instead of manual or email based processes, Winshuttle allows companies to streamline workflow processes that removes rework and delays from the processes.
    • For example, stock can be managed with cleaner and better materials information which will eliminate ERP data errors that could have meant higher/lower inventory levels. This also leads to smaller warehouses.

In summary, the Winshuttle platform utilizes lean applications that streamline data collection, data validation and data movement. Using existing investments, these lean applications are built iteratively in short cycle times, to help you meet and exceed your KPI goals, and improve process efficiency.

 

Want to learn more about improving your supply chain processes? Our SCM luncheons are coming to a city near you:

December 3rd in Houston

December 8th in Atlanta

December 10th in Cleveland

About the author

Israel Rosales

Israel has a degree in Computer Engineering from ETSII in Seville and an Executive Master Degree in SCM (Supply Chain Management) from ICIL Madrid, where he is also a part time lecturer for Lean Manufacturing. After 10 years in the SAP SCM arena, he joined Winshuttle in 2012 and is currently Enterprise Solutions Manager, specialized in Lean, SCM and Master Data. When he's not solving ERP problems, he shares his life with his wife, daughter and two dogs.

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