The easiest way to communicate and show the value of a supply chain operations improvement initiative is to link productivity to cost savings. For example, when warehouse staffs pick the orders faster, cost per order can be reduced. However, this situation holds true only if you are talking about the hourly employee.
Suppose purchasing department can issue the orders much faster (say from 100 orders a day to 1,000 orders a day), can you really reduce cost? The answer is NO because purchase order is usually handled by the salary employee who is paid a fixed amount every month. Fixed cost that you have to pay no matter what is called "Sunk Cost" which should not be included in a decision making.
In short, higher productivity doesn't always mean lower cost.
2. Utilization Metrics
Machine utilization is a classic example of this kind of metric. It's usually expressed as,
"Machine Time / Available Time" (the higher ratio the better)
So you try to keep machine time as high as possible by building stocks when there is no much demand to fill or try not to change jobs at all to reduce setup time. The consequence of this is that you end up with stocks you can't really sell and the loss of flexibility.
Sticking to much to machine utilization is the sure way to hurt the overall performance.
3. Conflicting Metrics
This happens when you evaluate suppliers. Suppose you want to buy the steel sheet products, the simplest KPI is "thickness tolerance" (say 0.5 inch +/- 5%). However, the exact same metric can create confusion between supplier and customer, for example,
- Supplier uses Digital Caliper to measure the thickness, 3 points along the edge of the steel sheet
- Customer uses Go/no go Gauge to measure the thickness, 1 point at the both end of steel sheet
Conflicting metrics can cause the big argument between supplier/customer if they are not identified and agreed upon in advance.
4. Personal Metrics
Inventory Turnover Ratio is always assigned to an inventory controller (why not? It's the inventory metric). Considering the basic calculation as below,
"Cost of Goods Sold / Average Inventory" (the higher ratio the better)
Can an inventory controller single-handedly reduce the inventory level? If the answer is NO, then, why inventory turn is always assigned to one person?
5. Unclear Metrics
A great example of this kind of performance measurement is Value at Risk as expressed as below
"VaR = Probability of Occurrence x Monetary Impact"
As you can see, the definition of this metric is clear as mud, especially how to quantify the "monetary impact" part. If you can to implement supply chain risk program, should you use more appropriate KPIs?
6. Too Many Metrics
The conventional wisdom is to "keep an eye on the ball". Then, traditional management always use a load of KPIs to monitor the performance because they believe this is the right thing to do. Anyway, they don't realize that using too many metric is the way to complicate the lives of your staffs and a significant amount of time will be used for data collection and reporting instead of doing something more productive.
7. Gaming Metrics
This is the result of applying too many metrics. Your staffs will try to game the system by finding the loophole to make the KPIs look better. For example, excluding some late delivery from the calculation of delivery performance.
What are some Supply Chain Metrics to avoid at all cost? The answer is the metrics that you really don't know how to apply properly.
Performance management is the journey, not the destination. So you should use metrics to create team synergy that drive action plans and supply chain metrics are the way to tell you where you are and how far can go.