The metrics that I became very found of to measure supply chain efficiency are nothing new, but we might have forgotten to appreciate them over time.
DOO – Days on Order – Measuring a company’s upstream supply chain by tracking the actual days between placing orders for parts and materials and their arrival at the company’s facility. Lower is better.
DOH – Days on Hand – Measuring a company’s efficiency by tracking the actual days that the company owns parts and materials or has them on stock until they are converted into sellable goods. Lower is better.
DOS – Days on Stock – Measuring a company’s conversion by tracking the actual days that the company has sellable finished goods and materials in stock. Lower is better.
OTIF – On time, in full – Measuring a company’s effectiveness by tracking the total share of customer orders which were delivered on time and in full, or in other words, as ordered by the customer. Higher is better.
These 4 metrics form the foundation of measuring our supply chain and the beauty is that they are all connected. Each metric has a range for optimal performance, a range where suboptimal but manageable performance is, a range where needless costs are made, and a range where risks are just waiting to turn into problems. Days on Order gives a wide range of wonderful examples for this. We might achieve very low DOO rankings with that local supplier which is willing to supply from stock. But what if that supplier gets into issues? Is that local supplier also offering the best price? It is not unthinkable that we do would do better business with a high DOO ranking, or that we reduce our business risks significantly by spreading our intake of parts and materials over several suppliers.
Whatever metric we measure, we must never forget that the metric itself is not the goal. The goal is to measure our performance against the business decisions we make and the range we expect. This teaches us that we should have the following responses to what the metrics are telling us:
- ALL OK – business operation within the range we agreed upon which should make us focus on KAIZEN based small-step continuous improvements.
- MINOR VARIATION – manageable variation at or just beyond the boundaries of the target range which should make us focus on managing corrective measures to bring business operations back within the target range.
- MAJOR VARIATIONS – recurring and or enduring variation that go beyond what a single department could manage which should make us focus on realigning our entire supply chain and operations to the situation and initiate counter measures which involve all departments.
- OVER PERFORMANCE – persistent over-performance is a clear indicator that we either were not ambitious enough when setting our targets or might have hidden risks in our supply chain that could become a serious risk. This situation should make us focus on (re)evaluating the metric and the risk evaluation.
There are many examples where minor variations can be handled by a single department, but a decision is needed which involves several departments. When OTIF is below target while we have optimal performance in DOO and DOH, we could for example either conclude that our sales department is over-committing, our we could conclude that we should increase our DOS to be able to respond better to variations in sales volumes and customer demand. A sales team might have entirely different priorities than the controller in this discussion.
The challenge that most companies will face to make these decisions based on facts, which include the financial and operational impact of those decisions, is that the supply chains are much more complicated than most of think. Something as simple as having 1 day of material more on stock can have massive impact on the entire company and its suppliers. Imagine that we are running our production close to the optimal performance. Where are we going to find the additional capacity to produce 1 day’s amount of additional material to place in stock? What if we don’t and we lose business because our competitors are able to deliver when we aren’t? What if we increase the risks in our upstream supply chain by ordering more materials from that one supplier and would increase the costs when we increase orders for multiple suppliers?
I can not say enough about the importance of having a Digital Twin of the entire supply chain to be able to analyze such scenarios and make decisions based on facts about the impact of changes. Such Digital Supply Chain environments allow us to understand the good and bad of our current settings and future paths. And in times of crisis like we experience due to COVID19, it will not solve the problems on its own but it will definitely support us in finding solutions, set priorities and manage the future instead of trying to managing the future based on the past.