Supply Chain Metrics for Profits

Effective supply chains are based on a long-term strategy, efficient managers, effective metrics, the ability to foresee the effects of decisions, and an understanding of the differences between links throughout the supply chain. Although each is important, replacing hunches with metrics enables managers to track quantifiable measures with rigorous methodology and quality data. The most successful metrics link operations to customers, vendors, and logisticians by monitoring the entire procurement process. The results are decisions that deliver actions before problems impact customers and flexibility that allows a company to change as required to reduce cost, improve responsiveness, and fulfill customer requirements.

Supply chains optimize independent nodes into a synchronized related parts to achieve maximum efficiency. Process-based performance measurement systems provide opportunities to recognize problems and proactively implement solutions, link operations to critical factors, enable appropriate allocation of resources, and improve trust and understanding across the supply chain. The economic recession forces executives to consider procurement performance as a way to improve profitability when sales are flat.

Procurement efficiency is not considered a strategic part of an organization because supply chains are not optimized, incentives are not tied to procurement performance, and technology is considered a quick fix to fundamental errors within the supply chain. Managers need the responsibility of monitoring key metrics and held accountable for performance. The modern business should note that leading companies employ supply chain management best practices as a way to reduce expenses and increase efficiency.

To accomplish effective management, metrics need to be aligned across multiple organizations and focused on critical areas that contribute to success. Many times metrics are misaligned or fail to measure appropriate performance, so the supply chain is inefficient, organizations miss opportunities, or conflict develops between supply chain members. Managers focus on evaluating internal performance with financial metrics, such as inventory turns and carrying costs, that do not reflect supply chain efficiency. Performance metrics lean toward internal performance and do not evaluate performance as interrelated nodes; thus, alternative metrics are needed to monitor performance from a supply chain perspective. The complexity of this task involves aligning independent operations and assigns a manager to account for the performance of the entire supply chain, not necessarily the performance of one part of the chain. The ultimate goal is to create a cooperative effort across functional areas and across companies to enable a seamless effort to support business objectives.

Although data may be collected, it requires analysis and usable presentation to be useful to managers. An example of useful analysis is the development of simulation models that estimate future performance based on historical data. Points of measure should focus on the customer throughout the process in order to attain maximum efficiency and effectiveness, not skewed to support perceptions of management. Recent trends in the global economy have forced business to turn a critical eye on their internal processes to find value in customer-centric strategies. Studies have shown that the results of strategic procurement practices are a return on investment of 40 percent by lowering costs, improving productivity, and increasing opportunities. When we consider leading companies manage their supply chains as a strategic part of their business and the significant return on investment, managers should consider how their supply chains could be improved to recover profits during these difficult economic times.