Hierarchy of Supply Chain

Metrics
Naveen Rajan

Challenges of Measuring

Too many metrics!

Define a clear strategy

Endless debate over definition

Cultural wars; lay down the law

Constantly changing metrics

Implement measurement strategy

now

Data too old by the time its

collected

Fix data issues

Gaming the system

Motivate consistently

Silo behavior

Cross-functional metrics

SCM Business Metrics by SCOR area

STRATEGY
Supply chain cycle time(latency)
New Product development cycle time
Cash to cash cycle time
COGS as % of revenue
PLAN
Perfect Order fulfillment
Indirect SC cost as % of revenue
Inventory accuracy
Forecast accuracy
Inventory days and Carrying cost
MAKE
OEE (Overall Equipment effectiveness)
Capacity utilization
Direct labor rate'
SOURCE
QPM (Quality Performance Metric)
On time delivery
Direct and Indirect Material spend as 5 of revenue
DELIVER/RETURN
Distribution Operational cost as % of revenue
Transportation cost
Order mgmt costs
Indirect SC costs
Return Cycle time

Best In Class (BIC)

The ROA measures the profitability of a firm relative to the assets it uses to generate the profits. It is calculated
as net-income divided by the total assets of a firm. When the inventories are reduced, the total assets of the
firm are reduced, thus increasing the return on its total assets.
The interest reduction translates into higher net profit, because the interest is deducted from the earnings
before interest, taxes, depreciation, and amortization (EBITDA) to calculate net profit. Lower working capital
requirements also lead to lower short-term debt. Lower debt levels improve a firms debt-ratio as well debt-toequity-ratio.

Order Management

Order Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Purchase
Order Cycletime

Primary

Measures the average time

consumed from the creation
of the PO to the receipt at
the location

(Time taken for Goods Receipt from the time

the PO is created)
The requested delivery date should not
exceed the agreed to lead time

Time

Minimize to an
Optimal Number

PO Lead-time

Secondary

Measures the PO latency

(delay) between the
initiation and execution of a
PO process

((PO Processing Time) + (Planned Delivery

Time) + (Goods Receipt Processing Time))

Time

Minimize

Perfect PO
Rate

Primary

Perfection of purchase
order is measured through
error-free rate of each stage
of a purchase order,
calculates the percentage of
perfect PO among all
purchase orders

- right amount of products

- damage free
- arrives on-time at the right location
- filled completely on the first call
- entered correctly
- communicated via a customer-specific
medium (e.g. EDI, fax, phone, internet etc)
- has no invoicing or collection errors

Maximize

% On time
Order
Delivery

Secondary

No of orders fulfilled on the

agreed delivery date
compared to the total
number of purchase orders
raised

- on-time delivery
- responsiveness to the customer
- compliance rate for order delivery on the
stated due date
- reliability of on time delivery
- reduced lead time
- enhanced product availability

Maximize

Order Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Order Entry
Accuracy

Secondary

Order Entry Accuracy is the

percentage of No of orders
with correct entries over
the total number of
purchase orders raised

- error free, entered correctly

- no ordering errors
- minimized rework
- one-time processing without errors/rework
- minimized communication of errors to the
vendors optimizing processing time
- enterprise solution supports enhanced
order entry process

Maximize

Order Doc
Accuracy

Secondary

Order Doc Accuracy is

measured by No of purchase
orders with complete
details among the total
number of purchase orders

- filled accurately and correctly in the first

instance
- filled completely in the first call
- complete information availability for
enhanced order processing
- minimized rework and repeat order entry
processing
- one-time processing without errors/rework

Maximize

Damage Free
Order Rate

Secondary

Number of orders with

damage free foods
compared to total number
of orders fulfilled

- product worthy of usage meeting consumer

specifications
- enhanced first pass yield (FPY)
- minimized product rework
- minimized process rework
- right quality of products

Maximize

Order Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Purchasing
Demand
Fulfillment
Ratio

Primary

Measures the percentage of

PO which were created
according to the needs of
the requester for fulfilling
the requesters
requirements regarding
delivery date and delivery
quantity

((No. of purchase request items bearing PO

item reference that fulfill time and quantity
expectations of the requester) / (Total no. of
purchase request items with PO item
reference)) * 100

Maximize

Number of
PO fulfilling
the demand

Secondary

Measures the number of

purchase request items with
PO item reference that fulfill
time and quantity
expectations of the
requester

- Metric used to evaluate how often the

purchasing department is fulfilling the
requesters requirements regarding delivery
data and delivery quantity

Number

Optimal Number

Number of
PO created

Secondary

Measures the total number

of purchase request items
with purchase order item
reference

- Metric used to evaluate the Purchase Order

Fulfillment Ratio

Number

Optimal Number

Price
Reliability

Primary

Measures the difference

between the PO price and
the invoice price per item

((Purchase order price Invoice price per

item)/(Number of Purchase Order Items))

Number

Minimize

Purchase &
Invoice Price
Variance

Secondary

Measures the PO price

deviation with reference
from Invoice Price

((Invoice Price Purchase Order

Price)/(Purchase Order Item))

Minimize

Order Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

No. of items
per PO

Secondary

Measures the number of

items per PO

Metric used in the evaluation of Price

Reliability Per Item of a PO

Number

Optimal Number

Aggregate
Purchase
Value

Primary

Measures the aggregate of

all the Purchase Order
Values

((Purchase Order Values))

Metric used to evaluate the net Purchase
Order Value for making spend analysis

Number

Optimal Value

Effective PO
Value

Secondary

Metric use d to track the

effective PO value used to
evaluate the Aggregate
Purchase Value

(PO Gross Value + Freight + Insurance)

Number

Optimal Value

Contract Management

Contract Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Average
Annualized
Contract
Value

Primary

Measures the annualized

contract value

Annualized Contract Value divided by its

duration

Number

Optimal value

Total
Contract
Value

Secondary

Measures the total annual

contract value

Important metric used to evaluate the

Average Annualized Contract Value

Number

Optimal value

Number of
years the
contract is
valid

Secondary

Measures the number of

years before which the
contract needs revision

Metric used to evaluate the Average

Annualized Contract Value

Number

Optimal value

Contract
Leakage
Ratio

Primary

Measures the number of

Purchase orders which do
not conform to the existing
contracts or negotiated
price

((Number of POs which do not adhere to the

existing contractual agreements) / (Total
number of POs raised))

Minimize

No. of
contracts
which are
not
referenced
for purchase

Secondary

Measures the percentage of

purchases that are made
off-contract

Metric used to evaluate the Contract Leakage

Ratio

Number

Minimize

Contract
Compliance
Ratio

Primary

Metric measures the

number of contracts which
are compliant or followed
for the Procurement
Process

((Number of contracts) / (Total Contracts

Signed and Formalized))

Maximize

Contract Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

No. of Noncompliant
Contracts

Secondary

Percentage of number of
contracts which did not
abide to any one or all of the
contract regulations agreed
to between the time of
raising PO and delivering
goods

- non-adherence of contract regulations

- legal processing and litigations
- contract deviation requests
- contract deviation communications
- revised negotiations
- additional time consumption in contract reformulations
- system generated contract processing

Number

Minimize

No. of Active
Contracts

Secondary

Metric keeps a track of the

number of formalized
contracts that ideally should
be followed

Measures the number of contracts that

ideally should be adhered to when
transacting procurement process

Number

Maximize

Contract
Cycle-time

Primary

Metric used to evaluate the

average time needed for a
contract to be formalized

((Average time needed between the Purchase

Requisition Time to the Formal Contract
Signed))

Number

Minimize

RFQ Leadtime

Secondary

Metric used to evaluate the

lead-time needed to address
any RFQ

((Time needed between the Purchase

Requisition to the time a formal Quotation is
received))

Number

Minimize

Bid
Submission
Lead-time

Secondary

Metric used to evaluate the

lead-time needed to submit
a bid proposal

((Time needed to address a bid proposal

submission))

Number

Minimize

Contract
Signoff Leadtime

Secondary

Metric used to evaluate the

total lead-time needed to
sign-off a contract

((Time needed between the initiated

Negotiation Process to the formal sign-off of
Contracts))

Number

Minimize

Contract Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Proposal-tocontract
Conversion
Rate

Secondary

Measures the number of

solutions accepted by the
customers as a percentage
of total number of proposed
solutions

- solutions actually accepted by the customer

and converted into a sale or contract
- ((Solutions converted to sales ) / (Total
number of proposed solutions))*100

Maximize

Contract
Value Change
YoY

Primary

Metric used to evaluate the

deviations in Contract Value
when compared with the
previous years value

(Mod(Current Negotiated Contract Value

Previous Years Negotiated Contract Value) /
(Previous Years Negotiated Contract Value)

Optimal Value

Previous
Years
Contract
Value

Secondary

Metric measures the

previous years contract
value

Metric used to evaluate the Contract Value

Change YoY

Number

NA

Current
Years
Contract
Value

Secondary

Metric measures the current

years contract value

Metric used to evaluate the Contract Value

Change YoY

Number

NA

Strategic Supplier Management

Strategic Supplier Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Supplier
Reliability

Primary

Metric used to evaluate the

supplier performance to
gauge how the supplier is
faring in the Procurement
Process

POs delivered on-time and completely as a

percentage of total POs committed to deliver

Maximize

Lead-time
Variance

Secondary

Metric used to evaluate the

lead-time variance

((Average time difference between the PO

delivery and committed delivery) /
(Committed Delivery Time))

Minimize

Quality
Variance

Secondary

Metric used to evaluate the

quality variance

((Number of POs rejected due to quality

defects as a percentage of total number of
POs))

Minimize

Purchase
price
variance

Secondary

Difference between actual

purchase unit price and
standard unit price,
multiplied by actual
quantity of input used. It
reflects a change between
the expected price and
actual price of input

- lowered price variations for a predictable

price point
- less deviation in price for a sustained
relationship with the vendor
- too often negotiations with the vendors for
deriving the right pricing points for all the
stakeholders
- encourages a suspicious relationship
between suppliers and manufacturers

Minimize

Strategic
Supplier Rate

Primary

Measures the number of

long-time collaborative
suppliers

Metric evaluates the number of strategic

suppliers having long-time relationship as a
percentage of total number of suppliers

Maximize

No. of
strategic
suppliers
identified

Secondary

Measures the number of

strategic suppliers
identified over a span of
time

Measure used to evaluate the Strategic

Supplier Rate

Number

Optimal Number

Strategic Supplier Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Total
Suppliers

Secondary

Measures the number of

total suppliers

Metric used to evaluate the Strategic Supplier

Rate

Number

Optimal Number

Supplier
Aging

Primary

Measures the number of

suppliers under each
category of aging factors

Metric used to evaluate the number of

suppliers falling in each category of the aging
factor and finally evaluate the total accounts
payable

Number

Optimal Number

Account
Payable Days

Secondary

Metric used to evaluate the

time frame given to vendors
before which they receive
their payments

Measures the obligations due to trade

suppliers who have provided goods/service

Number

Optimal Number

% Unpaid

Secondary

Metric used to evaluate the

total unpaid amount as a
percentage of total accounts
payable amount

Metric used to calculate the total unpaid

account payable amount as a percentage of
total accounts payable amount

Minimize

Supplier Ontime Delivery

Primary

The percentage of orders

that are fulfilled on or
before the original customer
requested date (suppliers
performance measured by
the customer)

- vendor quality compliance

- vendor adherence to quality & delivery
performance requirements
- supplier responsiveness
- order flexibility
- communicated via a customer-specific
medium (e.g. EDI, fax, phone, internet etc)

Maximize

Orders
received ontime

Secondary

Metric used to evaluate the

on-time orders receipt

Measures the number of orders received ontime as a percentage of total number of

orders

Maximize

Strategic Supplier Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

% On-time
Delivery

Secondary

No of orders fulfilled on the

agreed delivery date
compared to the total
number of purchase orders
raised

- on-time delivery
- responsiveness to the customer
- compliance rate for order delivery on the
stated due date
- reliability of on-time delivery
- reduced lead time
- enhanced product availability

Maximize

Transportati
on Cycle
Time

Secondary

Time spend for

transportation [includes
packaging]

Transportation cycle time for a given routing

is the average time from release of the
finished product or unit of work to its arrival
at the end of the routing at the customer's
place (this includes packaging and secondary
packaging requirements)
- efficient usage of fleet of logistics resources
- enhanced & optimized distribution network
enables an optimal transportation cycle time

Time

Minimize

Supplier
Order Fill
Rate

Primary

The value of this KPI is

dependent on the
purchasing DC's
performance and/or from
the quantity of reliability of
`company's suppliers. This
KPI gives a hint how often
the merchandising /
purchasing department can
fulfill users requirements.

- responsiveness to the customer

- responsiveness in delivery lead time
- right product dispatch

Maximize

Strategic Supplier Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Orders with
correct
shipment
quantity

Secondary

Measures the number of

orders with correct
shipment quantity

Metric used to calculate the Supplier Order

Fill Rate

Number

Maximize

Total Orders

Secondary

Keeps a track of the total

number of orders

Total Orders are used to evaluate the

Supplier Order Fill Rate

Number

Optimal Number

Supplier
Service
Accuracy

Primary

Measures the number of

orders that are accurate and
complete in all regards

((Number of Order that are complete and

accurate in all regards) / (total number of
supplier orders)) * 100

Maximize

Supplier
Orders both
complete and
accurate

Secondary

Measures the complete and

accurate orders

Metric used to evaluate the Supplier Service

Accuracy

Number

Optimal Number

Supplier
Service
Performance

Primary

Measures the
responsiveness factor of the
suppliers

Metric evaluates the number of times the

supplier is available for attending to service
requirements as a percentage of total number
of times the service is needed

Maximize

No. of times
service is
available
from
supplier

Secondary

Highlights the number of

times the supplier is
available to attend to
service needs

Metric used to evaluate the Supplier Service

Performance

Number

Maximize

No. of times
service is
expected to
be available
from
supplier

Secondary

Highlights the number of

times the supplier is
expected to attend to the
service needs

Metric used to evaluate the number of times

the supplier is expected to make a service
but may be delayed owing to availability
issues

Number

Optimal Number

Strategic Supplier Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Supplier
Material
Quality

Primary

Measures the number of

orders adhering to the
quality regulations mutually
agreed for each supplier

((Number of orders adhering to the quality

regulations) / (Total number of orders) for
each supplier) * 100

Maximize

Orders
within
Specification
Tolerances

Secondary

Measures the total count of

orders that fall within the
specification limits as per
the contract

((Number of orders falling within the

specification limits or tolerances as per the
quality regulation) / (Total number of orders
for each supplier)) * 100

Maximize

Spend Management

Spend Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Maverick
Spend

Primary

Maverick spend is
something which is not
purchased based on
purchase documents like a
purchase order or a
contract

((Invoice Value without PO and without

Contract) / (Total Invoice Value))*100

Minimize

No. of spend
outside the
contract

Secondary

Measures the total spend

that falls outside the
purview of a formal contract

Metric helpful in evaluating the Maverick

Spend

Number

Minimize

One-off
contract
Spend %

Secondary

Measures the spend on oneoff contracts as a

percentage of total spend

Metric synonymous with Maverick Spend

Purchase processed in an ad-hoc fashion
resulting in paying a premium for that item or
service

Minimize

Total Spend

Secondary

Total amount of money

spent by an organization in
procuring products and
services externally each
year

- financial metric evaluating operating costs

equivalent to 'Selling, General &
Administrative (SG&A)'
- monitors the way in which companies
control and optimize the money they spend
- inherent goal involves cutting operating and
other costs of doing business

Number

Arbitrary Number

Procurement
ROI

Primary

Measures the effectiveness

of the procurement
department

((Implemented savings / Operating Budget ))

Number

Maximize

Implemented
Savings

Secondary

Metric to evaluate the total

number of implemented
savings done by the
Procurement function

Metric used to calculate the Procurement ROI

Number

Maximize

Spend Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Operating
Budget of the
Purchase
Organization

Secondary

Total costs incurred by an

organization in running and
operating a Procurement
function

- this metric includes the total costs incurred

in running the Procurement function
- costs components include employee pay,
emoluments, facility, equipment, enterprise
IT solution etc

Number

Minimize

Cost of Single
Requisition

Primary

Total costs borne by the

procurement function in
processing a single
requisition

((Total Spend) / (Number of

Requisitions))*100

Minimize

Total cost of
requisition

Secondary

Measures the total cost of

requisitions

Metric forms the basis for evaluation of Cost

of single requisition

Number

Minimize

No. of
Requisitions

Secondary

Measures the total number

of requisitions

Metric used to evaluate the Costs incurred in

the processing a single requisition

Number

Optimal Number

Cost
Avoidance %

Primary

Measures the total potential

for a cost avoidance as a
percentage of the total
spend

Metric useful in evaluating the potential cost

reductions possible by a better term contract.
It measures the Opportunity for reduction in
a future investment or expenditure resulting
from decisions made through the initiative.

Maximize

Future costs
reduced on
collaboration

Secondary

Measures the total costs

reduced thereby savings
done by collaboration

Savings from anticipated increased

expenditures through opportunities driven
from direct procurement management and
decisions

Number

Maximize

Present cost
of Ordering

Secondary

Tracks the present cost of

ordering

Metric used to evaluate the Cost Avoidance %

by tracking the current costs of ordering

Number

Minimize

Spend Management KPIs

KPI

Level

Interpretation

Characteristics

Unit of
Measure

Direction of
Improvement

Procurement
Spend (% of
Sales)

Primary

Total amount of spend that

the procurement function
controls as a percentage of
Sales

- the top management assigns a certain % of

total spend to the procurement department
as a percentage of total Sales
- % of total company spend managed with
contracts or a strategy
- this KPI measures the degree of trust that
the management places in the procurement
function's capabilities

Optimal Number

Procurement
Spend

Secondary

Total amount that is spent

by the procurement
function

Metric used to evaluate the Procurement

Spend (% of Sales)

Number

Optimal Number

Total Sales

Secondary

Tracks the total sales figure

Total sales used to calculate the procurement

spend as a percentage of the tracked total
sales

Number

Optimal Number

The Hierarchy of Supply Chain Metrics

Demand
Forecast

Assess

Better Demand Forecasters Have

15% less inventory

17% stronger order fulfillment
35% shorter cash-to-cash cycle times

The Importance of Demand Visibility

Change in
Demand Forecast
Accuracy

20%

15%

10%

5%

0.0%
0%

5%

10%

15%

Change in Perfect Order

20%

25%

The Hierarchy of Supply Chain Metrics

Demand
Forecast
Perfect
Order

Assess
SCM
Cost

Cash-to-Cash

AP
Supplier
Quality

Cost
Detail

Diagnose

Inventory
Total
Supplier
On-Time

Production
Schedule
Variance

RM
Inv

Plant
Utilization

AR
Purchase
Costs

WIP + FG
Inventory

Dir Mtl
Costs

Order
Cycle
Time

Perfect
Order
Detail

Correct

The Hierarchy of Supply Chain Metrics: Example

Demand
Demand
Forecast
Forecast

(Strong)

Perfect
Order

Assess
SCM
SCM
Cost
Cost

Cash-to-Cash

Supplier
Supplier
Quality
Quality

Cost
Detail

Diagnose

Inventory
Inventory
Total
Total

AP

(Weak)

Supplier
Supplier
On-Time
On-Time

Production
Production
Schedule
Schedule
Variance
Variance

Strategic
Benefit Predictable
Returns to
Shareholders

RM
RM
Inv
Inv

Plant
Utilization

AR
Purchase
Purchase
Costs
Costs

WIP + FG
Inventory

Dir
DirMtl
Mtl
Costs
Costs

Order
Cycle
Time

Perfect
Order
Detail

Tactical
Cash Efficiency
Working Capital

High Inaccurate
Shipments

Correct
Correct
Operational Execution
Stability of Processes Driving Value

Three Levels of Metrics

Executive Dashboards

Forecast
Accuracy

Alignment

Perfect Order

End-to-End Supply Chain

Cash-to-Cash

Inventory Total

AP
Supplier Quality

Cost
Detail

Functions

SCM Cost

Sourcing &
Procurement

AR
Supplier On-Time

Production Schedule
Variance

RM Inv

Purchase Costs

Dir Mtl Costs

Order Cycle Time

Plant Utilization

Perfect Order Detail

WIP + FG Inventory

Manufacturing

Logistics

Performance Management Strategy: Global

Architecture, Multiyear Journey
Future State

Current State

Metrics
Tools
Processes
People

The Critical Ratio

Solution to the Newsvendor problem:
cu
dg (Q)
0 F (Q*)
dQ
c0 cu

= cu /(co + cu ) is called the critical ratio

b relative importance of stockout cost vs. markdown cost

Example: Mrs. Kandells Christmas Tree Shop

Order for Christmas trees must be placed in Sept

Cost per tree: $25

Price per tree:

$55 before Dec 25

$15 after Dec 25

If she orders too few, the unit shortage cost is cu = 55 25 = $30

If she orders too many, the unit overage cost is co = 25 15 = $10

Past
Data

Sales

22

24

26

28

30

32

34

36

Probability

.05

.10

.15

.20

.20

.15

.10

.05

How many trees should she order?

Mrs. Kandells Problem, solved:

cu = 55 25 = $30
Past
Data

D 22
Probability 0.05
F (D ) 0.05

co = 25 15 = $10
24
0.1
0.15

26
0.15
0.3

28
0.2
0.5

= cu /(co + cu ) = 30/(30 + 10) = 0.75

NOTE:

30
0.2
0.7

32
0.15
0.85

34
0.1
0.95

36
0.05
1

optimum 31

E(D) = 22x 0.05 + 24 x 0.1 + + 36 x 0.05 = 29

Newsvendor model: effect of critical ratio

D 22
Probability 0.05
F (D ) 0.05

24
0.1
0.15

26
0.15
0.3

28
0.2
0.5

30
0.2
0.7

32
0.15
0.85

34
0.1
0.95

36
0.05
1

= cu /(co + cu ) = 30/(30 + 10) = 0.75 optimum: 31

overstock cost less significant order more

overstock cost dominates order less

Summary

When demand is uncertain, we minimize expected costs

newsvendor model: single period, with over- and under-stock costs

Critical ratio determines the optimum order point

Critical ratio affects the direction and magnitude of order quantity

Concluding remarks on inventory control

Inventory costs lead to success/failure of a company
Example: Dell Inc.
Dell's direct model enables us to keep low component inventories
that enable us to give customers immediate savings when
component prices are reduced, ...
Because of our inventory management, Dell is able to offer some
of the newest technologies at low prices while our competitors struggle
to sell off older products.

Drive to reduce inventory costs was main motivation for

Supply Chain Management
next: Quality Control