As the saying goes, what gets measured gets improved. The same is the case with supply chain management. End to end supply chain operations related to planning, sourcing, production and logistics have specific metrics that help us improve processes and overall performance.

For every metric, there is a target number or goal that needs to be agreed upon. Then, each of those metrics is linked with a strategic objective or a key value driver (KVD), and is further supported by planned initiatives that help in achieving the target or goal.

Demand Planning Metrics

Demand planning metrics relate primarily to forecast error metrics. They include:

• Mean Absolute Percentage Error [MAPE]
• Weighted Absolute Percentage Error [WAPE]
• Mean Squared Error [MSE]
• Forecast Bias, and
• Forecast Value Added [FVA]

Of these, Forecast Bias and FVA are critical and should be tracked over the planning time horizon. Bias indicates the direction of the forecast errors and helps us understand whether we are under-forecasting or over-forecasting.

FVA is a measure of the value added during the forecasting cycle. It is measured by comparing forecast accuracy before and after each activity in the demand forecasting and planning process to determine if that activity improved the accuracy of the demand forecast. Tracking FVA during the forecasting cycle enables us to find the right mix of quantitative and qualitative approaches that result in fewer errors.

Supply Planning Metrics

Supply planning metrics are related to sourcing and production. They include:

• Order Confirmation to Delivery Lead Time
• OTIF % [On Time in Full]
• Material Availability for Monthly Production Schedule
• % Rejections and % Returns
• Spend Analysis [By Product Mix and Supplier]
• Direct and Indirect Category Analysis and
• Supplier Performance Index

These metrics allow us to understand supplier performance and to perform spend analysis.

• Production/Manufacturing metrics include:
• Daily schedule adherence
• Production loss
• SKUs with excess production
• SKUs with shortage in production
• Line Utilization %,
• OEE% (Overall Equipment Effectiveness)

It is essential to segregate the metrics into daily, weekly, monthly and quarterly buckets. However, the most crucial performance indicator is OEE % as it gives a snapshot of equipment productivity, product quality, utilization and speed.

S&OP Metrics

During S&OP meetings, the appropriate metrics are reviewed and discussed with the respective functional teams during each phase or step of the S&OP cycle.

Logistics & Distribution Metrics

This section covers metrics related to warehousing, transportation and distribution operations.

Warehousing metrics

•  Dock to Stock Cycle Time
• Inventory Accuracy %
• Operating Costs [Budget vs Actual]
• Detention Costs
• MHE Utilization %
•  Process Productivity Metrics
• Order-Delivery Cycle Time and
• Environment-Health-Safety Metrics

The metrics that are critical and need extra attention are the ones related to inventory management and customer order management. Accurate inventory management within the warehouse is critical to ensure correct order picking, packing, staging and loading operations. End to end order management from order receipt to fulfilment to proof of delivery are central to warehouse operations.

Transportation metrics

• Truck Placement Reliability
• Loading Time
• Unloading Time
• Transportation Lead Time
• Operating Costs
• Vehicle Capacity Utilization %

In the case of transportation, vehicle arrivals at the appointed times are critical for timely onward operations. Monitoring transportation lead times are also essential, especially for last mile deliveries.

Distribution metrics

• Despatch Schedule Adherence
• OTIF [On Time-In Full] %
• Customer Order Confirmation to Delivery Lead Time
• Product Returns %
• Customer Satisfaction Score

As an extension, customer satisfaction and product returns metrics need to be measured and monitored. Most 3PL and 4PL service providers invest in processes and systems related to customer issues. Order fill rates and customer satisfaction metrics need to be focused upon and prioritized.

Other Relevant Metrics

The advent of e-commerce and quick commerce has resulted in ever-increasing reverse logistics and material flows. Therefore, metrics related to reverse flows are as important as forward flows. Also, macro-economic factors, geopolitics, climate events, trade flows, fluctuating commodity prices, etc. have necessitated the measurement and monitoring of resiliency metrics.

Reverse logistics metrics

• Logistics Costs and Product Returns as a % of Sales

The challenge here is to minimize or reduce product returns and therefore reverse logistics costs. Just like the forward supply chain, designing the reverse supply chain is essential in ensuring that returned products can be inspected, segregated and reused, repurposed or refurbished depending on the type of product

Resiliency metrics

• Time to Survive (TTS)
• Time to Recover (TTR)
• Financial Impact (Sales and Profitability)

Resiliency metrics became extremely important for supply chains following the COVID-19 pandemic. Companies soon realized how every supply node in the chain could affect downstream activities due to material shortages and supply delays.

For firms that had a global network of suppliers, the ‘Time to Recover’ took several weeks and months. Moreover, supply related constraints had an adverse impact on demand that eventually affected sales and profitability numbers. Firms have started to invest in tools and systems that enable ‘what-if’ scenario analysis – what the financial impact might be in case a supply node is unable to perform as planned.

Linking Operational & Financial Metrics

The various operational metrics and performance indicators listed above have a direct or indirect impact on business performance – more specifically, financial performance. Therefore, it is essential to establish a link between operational metrics and financial metrics.

The key financial metrics to focus on include:

• Cash to Cash Cycle Gross and Net Working Capital
• Inventory Turnover Ratio
• Gross Margin and Net Margin %
• Return on Assets (ROA)
• Return on Capital Employed (ROCE)

Cash to Cash Cycle, Gross and Net Working Capital and Inventory Turnover Ratio are the three metrics that should be on the radar of the supply chain management team. All the demand, supply and distribution plans and their execution have a direct bearing on the cash conversion cycle and working capital levels. ROA and ROCE are impacted by supply chain operating costs. Any reduction or saving in procurement costs, inventory handling costs, production and logistics costs shall have a positive impact on ROA and ROCE. The operational metrics can be dovetailed into a relevant business/financial scorecard every month, quarter, and financial year.

People, Processes & Systems

Finally, for any performance management philosophy to work, there is a need to put in place the right team with suitable skills and understanding of the supply chain domain in addition to devising and deploying the appropriate processes and procedures for data management (data recording, reporting, monitoring and analysis) and selecting the right tools, software and systems for reporting, analysis and visual management.

Visual management tools such as dashboards, functional control towers and related systems could go a long way in monitoring key operational metrics on a real time basis to enable course correction and development of corrective and preventive action plans going forward.

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The onset and the spread of the coronavirus will entail alterations in the way supply chains and businesses are run. This is a truly both a humanitarian and an economic crisis – the type that we haven’t seen so far.

It is in this light that a function/profession hitherto taken for granted has come into the limelight. Logistics and supply chains keep the world economy and global trade humming. However, given the massive lockdowns and the socio-economic costs of these decisions, supply chains are coming under severe stress. Moreover, no risk model could have predicted the monumental shocks and effects that this virus would bring with it.

So, given this scenario, what can we do as demand planners, logisticians, sourcing, and supply chain professionals? There are no easy and clear answers. But it is a good time to revisit the 3Vs – Visibility, Velocity and Variability.

Any endeavor at this stage should be towards controlling variability and increasing system wide visibility and velocity. Below I present some thoughts and suggestions that might help. These have been divided into “Strategic” and “Tactical/Operational” responses.

Strategic Response

Supply Chain Design: It may be worthwhile to go back to the drawing board and take a quick look at the existing supply and distribution network and all the nodes across the chain.

Key areas to focus on:

• Demand planning process
• Demand aggregation
• Number of product groups
• Product and Inventory classification
• Customer segments
• Warehousing and physical distribution infrastructure

Any supply chain these days is designed to be responsive, agile and flexible – whether on the supply side or the demand side. Moreover, customer fulfilment / order management is primarily governed by a combined Push-Pull strategy. Companies in most industries (barring those operating in Make-To-Order and Engineer-To-Order environments) use Push-Pull based strategies.

Given that the current scenario is highly uncertain it is necessary to focus on customer as well as product segmentation based on “Push” and “Pull”.

Products with a steady demand can be stocked based on forecasts. However, for products with uncertain demand, we need to use a consumption-driven approach. It is here that this kind of pure “Pull” based strategy might work for companies.

Operations Excellence Philosophies: Pull-based systems such as Lean and TOC (Theory of Constraints) could be implemented. Daily distribution requirement plans (DRP) could be generated for movement of products through the primary chain (Plant to Fulfilment Center/Regional Distribution Center). Inventory norms or buffers would need to be calculated for the relevant SKUs. It is essential to ensure product availability in the primary chain through efficient replenishment planning.

At this time, it may be prudent for the planner to devise inventory rationing/allocation based on defined business rules. This would enable optimized allocation and distribution of critical products to the key distributors or retailers in the chain. This approach is particularly effective for CPG, food, health care and pharmaceutical companies where availability of essential items is of utmost importance.

Omnichannel Distribution: From a distribution standpoint, it is recommended to adopt an omnichannel approach where a mix of online and physical distribution can be used to reach the end customer/consumer. Most companies are using online channels but brick and mortar stores continue to play a major role.

Tactical/Operational Response

The demand planner needs to focus on two key metrics: Availability % and OTIF % (or Product Fill Rates). These metrics need to be monitored on a daily basis. Close coordination with the transportation teams is very important. Given the daily consumption and distribution patterns, there could be a higher proportion of LTL (Less Than Truck Loads).

As mentioned earlier, for demand side management and order fulfilment, it is essential that production systems and strategic suppliers are flexible. Lean production systems can facilitate this thanks to shorter operational lead times and quick changeovers.

Tools & Techniques: Given the current uncertain and evolving situation,  demand planners need a system that aids in dynamic planning through the use of scenario analysis and “What-If” analysis. A flexible planning approach is needed and even short term forecasts need to be reviewed.

S&OP/IBP: These meetings need to take place more often – daily or weekly basis. This will help to get a grip on pipeline and channel inventories, service levels and product availability.

Risk Management Tools: This is the right time to invest in a risk management tool or system that can model the impact of potential risks across the supply chain. The output from this system can be used as an input for integrated supply chain planning.

Summary

There is no magic bullet for demand planners and supply chain professionals to solve current problems. But what we can do is review the supply chain design and associated strategies in addition to the planning and distribution systems in the light of the push-pull boundary.

• Daily visibility into consumer/customer consumption is essential. Focus on two key metrics: Fill Rates/OTIF % and Availability %
• S&OP/IBP meetings need to be more frequent. It is good idea to invest in risk management tools and systems.
• The aim should be to minimize variability and increase system-wide velocity and visibility. Transportation and distribution operations are the key differentiators.
• Inventory allocation and rationing needs to be adopted based on segmented products and customer profiles.
• Last but not least planners need tools to enable dynamic planning. These tools include “What-If” and “Scenario Planning”.

We will need to wait and watch how this crisis evolves over the next two to three months and calibrate our supply chain strategies accordingly. Your approach will differ based on your industry types – CPG or non-CPG.

 You can find more insight into demand planning from Sunil Bharadwaj in his article Demand Management and S&OP — Present and Future, published in the Spring 2018 issue of the Journal of Business Forecasting.