New Year’s Resolution #1 for Supply Chain Planners: Improve Performance Measurement

New Year’s resolutions: useful gimmick for getting your life in order, or standing joke?

The answer to this question is entirely up to you. But regardless of whether you plan to read a book every week, go running every day at 6 AM, or finally put some money in your IRA, I believe the New Year is a perfect time to make some resolutions about your supply chain.

Over my next few articles, I’ll share some tips on the kinds of resolutions you can put in place to get your supply chain performance back on track in 2015. Of course, if your supply chain is already humming, then these tips can help you achieve even greater levels of performance.

New Year’s Resolution #1: “I resolve to put effective supply chain performance measures in place.”

Just about every company uses some kind of measures to gauge their supply chain performance. I’m not sure I’ve ever talked to a Demand Solutions customer who wasn’t at least tracking their inventory levels, overstocks, stockouts, and so forth.

These are good measures, but they don’t tell the whole story. Relatively few companies have adequate measures of order fill rates or forecast accuracy.

When measuring order fill rates, many manufacturer and distributors often fudge the numbers to make them look better than they really are. Let’s say a customer ordered ten line items for ten different widgets each. And let’s say that we have seven line items in stock and can ship them complete. To fill the 8th line item complete we had to ship the product from a DC across the country. For the 9th line item we ran an overtime production shift to get the order shipped complete on time. Finally, we had to ship the 10th line item two units short. Ten lines ordered, and we shipped 98 out of 100 units on time.

The company proudly reported a 98% fill rate. Right? I say we all need to dig deeper. By my calculation, we shipped 7 lines complete and either expedited or short shipped 3 lines, a 70% fill rate. My definition of fill rate is, “the percentage of line items shipped complete from the customer’s default location, without expediting.”

As you can see, line-item fill rate gives you a much more accurate look at the quality of customer service you’re delivering. Make it your New Year’s resolution to start using this more granular metric.

Some companies are so committed to achieving outstanding fill rates that they’ll go “above and beyond” to fill customer orders. When an item is out of stock in their Massachusetts warehouse, they’ll overnight it from their Texas warehouse just to make sure they fill the order. Or they will run an overtime shift, at premium labor rates.

That’s great for fill rates, but not always so good for the bottom line. Given the premium shipping costs or labor costs involved in scenarios like these, does it really make sense to fill the order on time? Wouldn’t it have been more financially responsible to make sure the forecast was accurate enough to prevent the stockout in the first place?

Which leads me to my next point….

Don’t Forget to Measure Forecast Accuracy, Too

It’s a great idea to measure line item fill rates and watch these numbers carefully throughout the year. But as you can see, your line item fill rates will never reach their full potential if your forecasts aren’t pulling their weight.

You may already have a visceral sense of how accurate your forecasts are, based simply on how often you seem to be rushing around doing damage control after stockouts. This isn’t good enough. To maintain a useful view of forecast accuracy, learn to use Weighted Mean Absolute Percentage Error (WMAPE) as a standard measure of forecast accuracy. Also, aim to measure your percent of SKUs within plus or minus 30% error.

My recommendation for line-item fill rate would be to measure your percentage of sales order lines filled from your primary stocking location. In other words, don’t give yourself credit for those overnight shipping situations, or for sending alternate products.

And don’t forget to measure inventory turnover using the simple equation of turnover = annual sales / average inventory.

Using these three metrics, I’m confident you can vastly improve your measurement of supply chain performance in 2015.

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