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Measuring Supply Chain Performance: Key Performance Indicators

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  • 0:01 Supply Chain Management
  • 1:21 Storage
  • 3:39 Manufacturing &…
  • 5:54 Lesson Summary
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Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

A big part of supply chain management is understanding how your company is performing. In this lesson, we'll discuss some key performance indicators for supply chain management, including what they are and how to calculate them.

Supply Chain Management

Hiroko owns a company that makes jams, salsas, and other condiments. In order to deliver her goods to the stores that order them from her, Hiroko has to order materials (like jars, labels, and ingredients), put them together into products, store the finished products until the stores are ready for them, and then deliver them to the stores. That's a lot!

Supply chain management is the administration of the process of purchasing materials, manufacturing product, and delivering the product to the customer. In Hiroko's case, her jars, labels, and ingredients are the materials, her products are the condiments, and her customers are the stores.

Think of the supply chain as a pathway. At the start of the path are Hiroko's suppliers, the people from whom she purchases materials. Then, a little further down the line is Hiroko's factory, where she makes the condiments. Further down the path is Hiroko's warehouse, where her inventory sits until it is time to deliver it to the customer. Finally, at the end of the pathway are the stores where Hiroko delivers her jams.

Hiroko wants to know how her company's supply chain is doing. Are they managing the supply chain well, or could it be more efficient? Are they spending money on the supply chain that they don't need to be spending?

To help Hiroko out, let's look at a few key indicators of supply chain performance.

Storage

There are several key indicators that will help Hiroko measure how well her supply chain is performing. One category of key indicator focuses on the purchasing and storage of materials and inventory. Remember the pathway that is the supply chain? This type of key indicator looks at either side of the factory - that is, how materials and inventory (or, completed products) are stored.

There are many different key indicators that fall into this category. One is storage space utilization. It costs money to have storage space. Building and maintaining warehouses and other storage spaces can mean big bucks for companies, so Hiroko (and business owners like her) will want to make sure that they aren't paying for too much storage space. They can do this by calculating storage space utilization, which can be viewed as the total storage space being used divided by the total storage space available.

For example, if Hiroko's warehouse is 10,000 square feet, but she only uses 5,000 square feet of it, her storage space utilization is 0.5, or 50%. That's not a great number, and may indicate that Hiroko should think about a smaller warehouse.

As we've seen, having storage space can cost lots of money. So it's really important that companies, like Hiroko's, don't have too much inventory sitting around waiting to be bought and shipped. If Hiroko has a million bottles of chutney that have been sitting on her shelves for six months, that's a problem, and not just because the chutney might be getting stale!

Another key metric is inventory on hand. Hiroko can calculate the inventory on hand by dividing the number of units available by the average number of units sold per day. This tells her how many days of inventory she has on hand. For example, if Hiroko knows that she sells about 1,000 jars of chutney per day, and she has 1 million jars available, she has 1,000 days of inventory on hand. That's way too much!

In general, the lower the number of days of inventory on hand, the leaner, more cost efficient an organization is running, to a point. There is such a thing as too lean of an operation, though, so Hiroko needs to make sure she has some inventory on hand for last-minute orders. Otherwise, she'll end up with unhappy customers. But, she doesn't need 1,000 days' worth of any kind of inventory!

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