Demystifying Supply Chain KPIs: A Deep Dive into the SCOR Model

Introduction

Recently, I conducted a poll on LinkedIn targeting supply chain professionals to gauge their interests, and the overwhelming interest centered on understanding Key Performance Indicators (KPIs) in supply chain management. In this article, I will focus on the critical KPIs utilized in supply chain roles, particularly employing the Supply Chain Operations Reference (SCOR) model, which is widely recognized in the industry and referenced in the APICS Supply Chain Professional programs.

We’ll categorize these KPIs into four main buckets: Reliability and Service, Asset Management and Cash, Cost, and Responsiveness and Agility.

Overview of the Four KPI Buckets

These four buckets can be visualized on either side of a seesaw. A balanced seesaw signifies that the supply chain is in equilibrium, which is our goal. Imbalance can emerge when, for instance, finance departments excessively tighten cash flow, jeopardizing reliability and service. Alternatively, attempting to heighten responsiveness can inadvertently escalate costs.

The COVID-19 pandemic is a prime example of this seesaw imbalance, as it disrupted supply chains worldwide, causing container shortages and dramatically increasing shipping costs. This instance serves to illustrate the importance of these KPIs in maintaining a stable supply chain.

Reliability and Service KPIs

The first KPI bucket is reliability and service. In the SCOR model, this section is designated "Reliability," but I will also incorporate service metrics, as a reliable supply chain enhances customer satisfaction.

Perfect Order Metric

The foremost KPI here is the Perfect Order. A perfect order meets four critical criteria:

Case Fill Rate: Did you deliver the correct quantity that the customer ordered? For example, if a customer ordered 10 apples and you delivered exactly 10, your case fill rate is 100%.
On-Time Delivery: Did you deliver the order by the promised time? Delivering on schedule (e.g., at 11:00 a.m. if promised) results in 100% for on-time delivery.
Invoice Accuracy: Was the invoice correct? If the invoice states you delivered 10 apples when you actually did, the score is 100%.
No Damages: Were there any damages during transportation? If there are damaged goods, then the perfect order percentage drops to zero.

Combining these four components results in the overall perfect order percentage.

Additional KPIs

Other important KPIs in this bucket include:

Forecast Accuracy: How accurately can you predict demand? Poor forecasting leads to stock shortages or excess that can spoil, increasing costs.
Production Accuracy: How precise is your production against what was planned?
Transportation Accuracy: How well do deliveries adhere to expected transit times?

The reliability of these metrics ultimately affects inventory management, costs, and customer satisfaction.

Asset Management and Cash KPIs

The next bucket revolves around asset management and cash. This relationship is integral as a significant amount of a company's cash is frequently tied up in inventory.

Cash-to-Cash Cycle Time

This metric assesses how rapidly cash flows through the supply chain. It can be calculated by summing:

Days of raw materials inventory
Days of finished goods inventory
Days of sales outstanding (DSO)

And then subtracting:

Days payable outstanding (DPO)

For instance, if a tire company's raw material inventory is $ 10 million over 30 days, and finished goods are $ 20 million over the same period, with a DSO of $ 30 million, the cash-to-cash cycle time can be calculated accordingly.

A negative cash-to-cash cycle time, as exemplified by Amazon, highlights more efficient cash management.

Inventory Turns

Another critical KPI is Inventory Turns, illustrating how many times inventory is sold or used over a period. Shorter days of inventory correlate with higher inventory turns, indicating a more efficient supply chain.

Cost KPIs

The cost bucket has two significant components: Cost of Goods Sold (COGS) and supply chain costs.

Cost of Goods Sold (COGS)

COGS is important because it directly impacts your gross profit. It is calculated by considering the opening inventory, adding purchases during the month, and subtracting the ending inventory.

Supply Chain Costs

Costs are incurred across various supply chain activities, including:

Cost to Plan: Expenses related to planning activities and systems.
Cost to Source: Costs associated with supplier management.
Cost to Make: Expenses for manufacturing.
Cost to Deliver: Logistics and transportation costs.
Cost to Return: The cost involved in processing returns, crucial in an e-commerce landscape.

Responsiveness and Agility KPIs

The final bucket focuses on responsiveness and agility, essential for adapting to market demands.

Customer Lead Time

How quickly can a customer obtain their order? For example, companies like Amazon have very short lead times. However, traditional manufacturing, such as automotive, may present lead times exceeding months.

Production Cycle Time

How frequently can an item be produced? Shorter production cycle times can minimize inventory levels, improving overall efficiency.

Conclusion

Understanding supply chain KPIs is crucial for optimizing performance and ensuring strategic alignment between finance and operations. This knowledge can empower supply chain professionals to navigate challenges and maintain equilibrium in their operations.

Keywords

Key Performance Indicators (KPIs)
Supply Chain Operations Reference (SCOR)
Perfect Order
Case Fill Rate
Forecast Accuracy
Inventory Turns
Cash-to-Cash Cycle Time
Cost of Goods Sold (COGS)
Cost to Deliver
Customer Lead Time

FAQ

1. What is the purpose of KPIs in supply chain management?
KPIs help organizations measure performance, ensuring strategic alignment and identifying areas for improvement.

2. How is a perfect order defined?
A perfect order is one that is delivered on time, in full, without damages, and with accurate invoicing.

3. What is the cash-to-cash cycle time?
It measures how quickly cash moves through the supply chain, incorporating various inventory levels and payment periods.

4. Why are inventory turns important?
Higher inventory turns indicate a more efficient supply chain as they demonstrate that inventory is moving quickly through the operation.

5. How do supply chain costs impact overall profitability?
Supply chain costs, including COGS and logistics, directly affect margins and profitability, necessitating their careful management.