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Optimizing Supply Chain Metrics

Dec 24, 2007
Supply chain metrics are important for company executives to have a better understanding of how their company operates within a period of time. By regularly monitoring the critical areas in the supply chain, they can be assured of efficient performance.

A supply chain is defined as the network of units that obtain raw materials, units that transform these materials to intermediate goods and final products, and business units that bring the products to customers through a distribution system. The main objective of logistics or supply chain management is to obtain the right products at the right place in the right quantities at the right moment at minimum costs. Modern supply chains have become too complicated that managing them requires more than just intuition. Statistical data would have to be accessed, monitored and analyzed to ensure the efficient performance of the entire network.

In line with this, metrics have been set in place as the standard of measuring supply chain performance. These measurements allow managers to track the development of the network. In supply chain management, three key success factors have been identified namely, customer satisfaction, inventories, and flexibility. Customer satisfaction is an essential factor since satisfying customers is the ultimate goal of virtually all management strategy. Often, customer service is also discussed along with customer satisfaction as the former is identified to be the primary driver of the latter.

Some of the customer service measures that could potentially affect the supply chain are the ability to fill orders promptly and the ability to deliver products or services promptly as promised. Inventories are also identified as one of the key areas in the supply chain. For many companies, keeping inventories are expensive but necessary costs as they have to maintain separate raw products inventories (RPI), inventories for products that are used in production and finished goods inventories (FGI). Consequently, it is the objective of companies to keep their inventories at low levels.

Flexibility, meanwhile, is the ability of a company to respond to any change in the external environment that could affect company operations. For manufacturing companies, this reflects their ability to change output levels depending on the changes of customer demand on products and services. Among the three success factors, flexibility is hardest to assimilate because it is largely affected by lengthy lead times, unforeseen external events and uncertainties.

A critical aspect in measuring supply chain performance is the identification of relevant metrics. Modern application of supply chain management in companies saw the incorporation of balanced metrics in all functional areas of a supply chain to aid in decision-making. When choosing supply chain metrics for standardization, the following characteristics should be considered: reliability, accessibility, relevance, and validity. The chosen metric should be reliable that it can manifest a consistent result. Likewise, it should be accessible that it can be obtained by investing only reasonable effort and cost. Retrievable information from a metric should also be relevant to company stakeholders. Lastly, the metric should be valid that it can measure performance in terms of a particular business context.
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