Measure What You're Managing

Supply chain performance is all about improving efficiency of the entire operation.

Measuring supply chain performance can be daunting, observes Andrew Kinder, director of product marketing for supply chain management solutions with Infor. "Manufacturers have to establish an integrated set of metrics that monitor overall performance and not get dragged down into the weeds where individual key performance indicators (KPIs) can mislead the observer and may even yield conflicting results," he notes. "In short, supply chain performance is not about local optimization."

Inventory levels, for instance, are not in themselves a measure of performance, Kinder points out. Rather, inventory serves the purpose of supporting manufacturing operations or customer service. "Flatten inventories just to impact the KPI and manufacturing and transport costs might go through the roof as you scramble to meet unpredicted changes in demand. An integrated set of supply chain performance measures would balance out local optimums and bring everything back to a common financial measure."

Every manufacturer has its own individual KPIs, and there is no single perfect set of supply chain metrics. Nevertheless, one common measure has emerged in recent years: the cash-to-cash cycle time.

"The cash-to-cash cycle time provides a link between supply chain operations and the business environment," Kinder says. It is a catch-all measure, he notes, of how well a company manages the entire product lifecycle, from demand anticipation, to materials procurement, to the manufacture, sale, delivery and ultimate purchase of the product by the customer. "Think of it this way: If the customer doesn't receive the perfect order -- on-time, in-full, good quality, etc. -- what is the reaction? Ultimately, the customer will not pay until the problem is resolved. This elongates the cash cycle."

When companies fail to properly anticipate demand and manufacture their products too far in advance, they've also purchased materials, employed workers and are carrying inventory that's sitting idle in a warehouse, waiting to be sold, further lengthening the cycle, he points out. Certain best practices, such as vendor-managed inventory, lean manufacturing and short-cycle demand planning, as well as a comprehensive sales and operations planning (S&OP) process, can reduce cash-to-cash cycle times. "Research shows these companies have a cash-to-cash cycle time one-third shorter than those who do not. In a time when liquidity is hard to come by and banks are reluctant to extend credit even to perfectly viable businesses -- cash protection is crucial."

As Kinder sees it, measuring supply chain performance will fuel a need for strong performance management analytics across the supply chain to improve visibility and provide an understanding of the factors that impact the big picture. The key to measuring supply chain performance, Kinder says, is to "stay out of the weeds, remember your supply chain is interconnected and keep your focus on the top-level goal."

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