Visit any manufacturer and observe the Balanced Scorecards (BSC), dashboards, reports and performance measurements they use. You’ll be able to tell relatively quickly how they define themselves as a business, what matters most, the level of collaboration going on and, most importantly, how they prioritize their customers (or how they don’t). Analytics, metrics and Key Performance Indicators (KPIs) need to define the most effective behaviors for a supply chain operation, including Inventory Warehouse Management, to get to its goals.
Using Metrics And KPIs To Drive More Effective Behaviors And Outcomes
- The purpose of using metrics and KPIs across Inventory Management Systems and supply chains is to drive the most effective behaviors, decisions and strategies possible.
- Improving on-time deliveries, increasing customer satisfaction, reducing operating costs and optimizing transport costs are the top four metrics and KPIs that are delivering the most value in Inventory Management Systems today.
- Metrics and KPIs that reinforce the silo-based behavior of many manufacturers (data & knowledge hoarding) are being replaced by those that reward and reinforce collaboration.
Selecting the best possible series of metrics and KPIs for managing an Inventory Management System and broader supply chain needs to begin with the following foundational elements:
- Metrics, KPIs and the analytics they power will change how everyone does their job related to inventory management and supply chains. Choose carefully.
- It’s easy to choose metrics and KPIs that capture efficiency, and far more difficult to choose those that reflect increases in effectiveness. Yet, the latter set are far more valuable.
- Resist selecting metrics and KPIs that are too broad in scope. When these are too broad, they won’t quickly deliver insights into the areas you need to take action on.
- Reduce and eliminate metrics that promote competition between departments by being too siloed, instead adopting ones that amplify and reward collaboration.
- Inventory Management and supply chain metrics need to reflect your company’s strategic objectives and reinforce contributions to those goals.
- Beware of vanity metrics that make a specific department or process look good, yet don’t deliver any insights into improving the effectiveness of inventory management, supply chains or production.
Exploring The 10 Most Important Inventory Management System Metrics and KPIs
Translating operational performance into financial reporting across an entire inventory management and supply chain system is what excellent metrics and KPIs do. They translate the many diverse activities across inventory and supply chain locations into financial data fast.
Companies with excellent inventory management systems also rely on frameworks to manage their metrics and KPIs into a common strategic direction. The American Production Control and Inventory Management Society (APICS) SCOR Model and Gartner’s Hierarchy of Supply Chain Metrics are two of the most popular frameworks for evaluating inventory management performance as part of broader supply chain networks.
Both are excellent frameworks to rely on when defining metrics that measure supply chain effectiveness and its impact on profitability. The SCOR model was recently updated to include support for omni-channel, blockchain, sustainability and several other major improvements. The Gartner Hierarchy of Supply Chain Metrics is a widely-adopted framework globally, and is briefly explained by Gartner. The latest edition of the APICS SCOR model is shown below:
Based on conversations with manufacturers over the last year, the following are the ten most effective Inventory Management System metrics and KPIs:
1. Demand Forecast Accuracy
An excellent metric for determining how strong collaboration is in a manufacturing operation, Demand Forecast Accuracy reflects the variation in real or actual demand and what is forecasted at the factory level. Inventory Management Systems can help make manufacturing operations more effective by closing the gaps between forecasted demand and actual demand. This metric also contributes directly to reducing inventory carrying costs, a key indicator of inventory management effectiveness.
2. Customer Satisfaction Levels
Often measured in Net Promoter Scores (NPS), customer satisfaction levels need to be measured across all distribution and selling channels. Best-in-class manufacturers measure individual selling and distribution channel NPS scores to index the customer’s order-to-delivery times and check if they are consistent with what customers initially expected.
3. Perfect Order Performance
Perfect order performance quantifies how effective an organization is at delivering complete, accurate and damage-free orders to customers on time. The equation that defines the perfect order Index (POI) or perfect order performance is: (Percent of orders delivered on time) * (Percent of orders complete) * (Percent of orders damage free) * (Percent of orders with accurate documentation) * 100. The majority of manufacturers are attaining a perfect order performance level of 90% or higher, according to The American Productivity and Quality Center (APQC). The more configurable products are, the more difficult perfect order performance is to attain. The rapid growth of Manufacturing Intelligence is making perfect order performance more attainable than ever across the spectrum of production strategies.
4. Fill Rate Effectiveness as a Percentage of All Orders
Concentrating on measuring how collaborative the entire supply chain is needs to be a priority when selecting metrics and KPIs to manage an inventory management operation. Tracking Fill Rate Effectiveness as a percentage of all orders directly reflects how many orders or requests for material from production centers are fulfilled. Taking this metric a step further provides insights into how well production centers are managing inbound inventories to meet customer delivery dates.
5. Gross Contribution Margins By Product, Production Facility And Business Unit
Best-in-class Inventory Management systems are designed to provide Gross Contribution Margin (GCM) performance levels across several different dimensions of business. GCM is one of the most effective metrics a business can use to evaluate how well collaboration is happening across business units. Knowing the GCM attributable to a given production center and tracking performance back to inventory management locations and strategies is a quick way to gain insights into effectiveness levels by location.
6. Order Cycle Time
Order Cycle Time measures how long it takes from when a customer places an order to when they receive their purchased product, reflecting how effective inventory management, supply chain, production and fulfillment operations are. For additional details on this metric, please see the article, What’s the Difference Between Cycle Time, TAKT Time, and Lead Time?
7. Order Pick, Pack and Ship Accuracy
This measures one of the most core functions within an inventory management system. Pick, pack, and ship is the process of locating inventory and packing the ordered items for shipment to fulfill customer orders. Customers can be any other department, organization or third-party manufacturers that ordered the shipped products.
8. Inventory Turnover
This metric measures how many times a manufacturer’s inventory is sold and replaced, or turned over, in a specific period. There are two approaches most often used for calculating Inventory Turnover. The first is by dividing Sales by Average Inventory for a specific period. The second is to divide the Cost of Goods Sold (COGS) by average inventory for a specific period. AccountingTools provides additional details on this metric.
9. Carrying Cost Of Inventory
An invaluable metric for measuring how much of a manufacturer’s working capital is tied up in inventory, this metric provides insights into the hard-to-find costs of handling items. These include put-away, costs of obsolescence and how effective warehouse management systems are in reducing logistics and fulfillment costs.
10. Supplier Quality Index
Integrating inventory management, quality and compliance systems into a single unified system of record delivers the advantages of tracking supplier quality and compliance to the vendor level. Medical product manufacturers need to provide this level of visibility to comply with the U.S. Food and Drug Administration mandate, 21 CFR Part 11.