In business and baseball, some statistics matter more than others.
For decades, baseball analysts, who called themselves sabermetricians, tried to convince baseball executives and managers that they were relying on the wrong statistics when making decisions about who to sign and put on the field. Baseball executives insisted that statistics like batting average, runs batted in, errors, and sacrifice bunts were important. However, sabermetricians argued otherwise, “Our research shows that your team will win more games if it uses players with high on-base percentages and slugging percentages and a high number of runs created and defensive runs saved,” they insisted.
For decades, the executives won most of these arguments. It was not until teams began exceeding expectations based on the sabermetricians’ methodology. Boston began winning World Series titles for the first time in more than 80 years and, by relying more on research than tradition, Oakland won more games than most teams.
Businesses that can determine which statistics matter can “win”, too. In the business world, the term “metrics” is used more often than statistics, but the concept is the same. Businesses have to consider a wide range of metrics, such as sales, revenues, and profits. This blog will focus on supply chain metrics that have a tremendous impact on a company’s finances.
“Supply Chain Metrics may include measurements for procurement, production, transportation, inventory, warehousing, material handling, packaging, and customer service, reports “12 Key Metrics For Supply Chain Management,” a blog by Simplicable, a management training and consulting company. “There are hundreds of metrics that can be used to score Supply Chain Management performance.”
Supply Chain Insights spent two years researching which supply chain metrics are the most important. The Philadelphia-based research firm analyzed how well hundreds of companies, across 22 industries, performed financially and within their supply chain from 2006 to 2014. Lora Cecere, the founder of Supply Chain Insights, wrote about the results of the study in a Forbes magazine article entitled “Driving Supply Chain Excellence: Understanding Improvement and Performance.”
Supply Chain Insights created the Supply Chain Index in an effort to help companies figure out which supply chain metrics improved their performance. “Our first task was to understand which metrics had the highest correlation to market capitalization,” wrote Cecere. “We found that it was performance of the metrics together — growth, inventory turns, operating margins and ROIC (Return On Invested Capital) –- that made a difference.”
Companies that have had the most success improving their supply chain metrics — and their market capitalization — have several characteristics according to Cecere. They include:
* Few changes in leadership of a company’s supply chain.
* Commercial and operations teams that are “more aligned.”
* Implementation of new technological systems correctly on the first try.
* Reporting logistics, manufacturing, and procurement results to the same individual.
* A communications strategy that results in employees understanding what constitutes supply chain excellence.
The 12 Key Metrics for Supply Chain Management
The “12 Key Metrics for Supply Chain Management” elaborates on which supply chain metrics matter. The 12 key metrics include:
* The percentage of orders that have no errors. There should be as few errors as possible in all the stages of a supply chain, including production, procurement, transportation, and warehousing.
* The number of days between when a company pays for materials it needs to make a product and when a customer pays for that product.
* The amount of time a company takes to deliver a product after it receives a purchase order.
* The percentage of a customer’s order that is delivered in the first shipment.
The other metrics are supply chain cycle time, inventory days of supply, freight bill accuracy, freight cost per unit, inventory turnover, days sales outstanding, average payment period for production materials, and on time shipping rate.
“Supply Chain Metrics and KPI Examples,” a blog by Klipfolio Inc., a software company that helps companies monitor their performance, lists 10 supply chain metrics and KPIs (key performance indicators) as important enough to “ensure that your operations are always running smoothly.”
The 10 metrics and KPIs are:
* Back Order Rate
* Carrying Cost of Inventory
* Inventory to Sales Ratio
* Inventory Turnover
* Order Status
* Order Tracking
* Perfect Order Rate
* Rate of Return
* Units Per Transaction
It’s great knowing which supply chain metrics maximize a company’s market capitalization, but knowing how to improve those metrics is important to creating a better business. Examining the case studies of companies that have achieved supply chain excellence could help.
The Supply Chain Insights report summarized in the Forbes magazine article identifies the following companies as having “Supply Chains to Admire” – CVS, Dollar General, Dollar Tree, Nike, Whole Foods, Walmart, AB InBev, CCL, The Clorox Company, Eastman, Estee Lauder, General Mills, L’Oreal, PPG, Audi, Cisco, Intel, Coloplast, EMC2, John Deere, Lexmark, Qualcomm, Samsung, Western Digital, and United Tractors.