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Measuring supply chain performance

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A supply chain is a system of organisations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

Supply chain activities transform resources, raw materials and components into finished products and services that are delivered to the customers.

A supply chain is as strong as its weakest link, bringing to the fore the need to identify the non-functionalities in the system. Supply chain performance measures can be quantitative or qualitative.

Qualitative aspects measures issues such as customer satisfaction and product quality. Emphasis shall be on the quantitative measures since what is measurable is only what is achievable.

The quantitative performance measures are in two forms, financial and non financial. We shall explore the non-financial measures in detail.

There are four common non financial quantitative measures — cycle time, customer service level, inventory levels and resource utilisation.

The new paradigm shift where organisations are now marketing-oriented require appropriate strategies to service diverse customer needs.

Cycle time or lead time is the end-to-end delay in a business process. These delays can be further divided into internal and external delays.

In summary, three types of lead time, internal, external and total exist. Some identify external lead time as the order-to-deliver time lapse and the internal lead time as need identification-to-order time lapse.

External lead time may differ depending on the supplier’s policy, some produce-to-order and some produce-to stock.

If the product needed is from produce-to-order, the delay might be longer taking into account manufacturing time. Internal lead time include all the processes that must be undertaken before an order is placed.

This includes internal authorisation processes, tendering process, the evaluations and approvals until the purchase order is released. Cycle time is measured in days.

Customer service level is a function of several different performance indicators.

The first one is the order fill rate which is calculated as a fraction of customer demands that are met from stock first time. This measure does not take into account lead times discussed above.

The second indicator is the stock-out rate. Stock-out rate is a complement of order fill rate and represents that fraction of orders unfulfilled due to a stock-out.

The third measure is back order level which enumerates the number of back orders waiting to be filled.

The forth indicator is the probability of on-time delivery which measures the fraction of customer orders that are likely to be delivered within the agreed delivery periods.

To maximise customer satisfaction levels, one need to maximise order fill rate, minimise stockout rate, and minimise backorder levels. The balance of variables come at a cost to the supplier.

Resource utilisation measures how assets – machinery, storage, transport and distribution, human and financial resources were used to maximise customer service level.

In the process of maximising customer service levels, lead times need to be minimised and inventory levels optimised.

High performing supply chain are those that have managed to group like activities, procurement, stores and logistics under one function in order to optimise resources utilisation and delight the customers.

Nyasha Chizu is a Fellow of CIPS and the branch chairman of CIPS Zimbabwe writing in his personal capacity.

Email: chizunyasha@yahoo.com

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