Metrics for Integration

Participants in a supply chain are unlikely to achieve their collective goals unless their performance measures (metrics) and incentives are aligned. Hence, metrics and incentives must be clearly and carefully defined, mutually agreed-upon, and monitored by all participants. Participants should be held accountable for some of each other’s performance measures.

To date, very few companies have succeeded in assessing the performance of their supply chains as a whole. Nevertheless, performance should be measured both on a highly aggregated basis and within specific segments. Although specific metrics must be tailored to the circumstances, the following metrics can be used for high-level assessments:

• profitability
• decision response time (time to make and implement key decisions throughout the chain)
• return on investment
• return on assets
• technology (the status of and ability to deploy value-enhancing technologies)
• product development time (the elapsed time from concept through initial delivery)
• shared risk (the extent of risk minimization and sharing throughout the chain)
• planning (the extent to which both strategic and short-range planning are performed in a coordinated and cooperative manner throughout the chain)
• quality (effective planning for and delivery of quality products, including appropriate measurement of results by all participants)
• customer satisfaction
• waste (reductions in scrap, rework, waste, and pollutants from the supply chain and plans for further reductions and recycling)
• transparency (the extent that participants are aware of activities throughout the supply chain)

Detail metrics should be selected for monitoring key functions, processes, and capabilities throughout the chain. Each participant’s detail metrics should roll up to an overall measure of supply chain performance. The roll-up should be designed to show how each participant in the supply chain contributes to overall performance. Otherwise, individual firms may take unilateral action to improve their financial or competitive position, which may compromise the performance of the supply chain as a whole. Although detail metrics differ from industry to industry, the ones listed below, which are often used by large corporations to monitor their internal operations, should be considered.

General:

• time to market (the speed at which the organization identifies and delivers new products to the marketplace)
• inventory levels and capacity utilization
• market to collection (the speed with which receivables are converted to cash)
• customer services (measures of after-market support to customers)
• management for results (the efficiency and effectiveness of management)
• infrastructure (the up-time and efficacy of information systems, training, and other support processes)
• return to available (measures of velocity, asset utilization, costs and revenue generated from reworking the product in the returns channel)

Delivery:

• delivery-to-commitment date (measures of meeting commitments)
• lead time (customer waiting period)
• faultless installations (installation errors; customer call-backs)
• faultless invoices (error rates in processing invoices)
• forecast accuracy (accuracy in predicting market demand)
• customer inquiry resolution time (elapsed time to resolve customer inquiries)

Flexibility and responsiveness:

• response time (measures of the responsiveness of supply chain processes or functions)
• productivity flexibility (measures of productivity changes as a function of market demand)
• re-planning cycle (time required to create and implement modified production plans)
• release-to-ship date (elapsed time between release of new or modified products and their shipment to customers)
• materials lead time (elapsed time between placement of an order and receipt of materials)

Logistics:

• logistics cost (product distribution costs)
• obsolescence (reduction in inventory value due to expiration of shelf life or changes in technology)
• warranty costs (rework, repair, replacement, shipment, and legal costs associated with defective products delivered to customers)

Asset management:

• cash-to-cash cycle (elapsed time between payment for goods and services used to produce the product and receipt of payment from the customer)
• inventory days of supply (inventory levels divided by average quantity used or shipped per day)
• inventory aging (measures of elapsed time that perishable or potentially obsolete goods remain in inventory)
• days of sales outstanding (accounts receivable divided by average daily sales)
• asset turns (frequency of inventory replenishment per year)
• ship-to-invoice cycle (delay in billing customer after product shipment)

Standards developed by associations and governing bodies provide a common language for communications, which can be used to increase awareness of supply chain performance. Standard techniques, such as statistical process control (SPC), can be useful for monitoring individual processes. However, although certification and conformance to standards is important, they are not always sufficient for measuring some aspects of supply chain performance. Benchmarking is another technique that can be used for measuring, understanding, and communicating the dynamics of supply chain performance.