7 Supply Chain Metrics To Avoid

Metrics are necessary to control the supply chain operations. But they may not be used correctly. We will tell you things to avoid about supply chain metrics.

7 Supply Chain Metrics to Avoid

1. Productivity Metrics

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 inventory 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 costs? The answer is NO because the purchase order is usually handled by the salaried employee who is paid a fixed amount every month. The fixed cost that you have to pay no matter what is called "Sunk Cost" which should not be included in 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 the 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 too much to machine utilization is the sure way to hurt the overall performance. Machine utilization is not a primary metric in a lean manufacturing initiative.

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 inches +/- 5%). However, the exact same metric can create confusion between supplier and customer, for example,
- The 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 a big argument between supplier/customer if they are not negotiated and agreed upon in advance. If you're using six sigma methodology, pat attention to this metric.

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 the 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 implement a supply chain risk project, should you use more appropriate KPIs?

6. Too Many Metrics

The conventional wisdom is to "keep an eye on the ball". Then, traditional operations management always uses a lot 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 metrics is the way to complicate the lives of your staffs and a significant amount of time will be used for data collection and report instead of doing something more productive.

7. Gaming Metrics

This is the result of applying too many metrics. Your team will try to game the system by finding the loophole to make the KPIs look better. For example, excluding any late delivery from the calculation of delivery performance.

What are some 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 drives action plans and metrics are the way to tell you where you are and how far can go.

- Hope, J., & Player, S. (2012). Beyond performance management: Why, when, and how to use 40 tools and best practices for superior business performance. Harvard Business Press.

- Frazelle, E. (2002). Supply chain strategy: the logistics of supply chain management. McGraw Hill.

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Last review and update: December 11, 2021
All contents are written by Ben Benjabutr unless marked as [Guest Commentary]

About the Author and Editor:
Ben Benjabutr is the author and editor of SupplyChainOpz. He holds an M.Sc. in Logistics Management with 10+ years of experience in supply chain management. You can contact him via e-mail.