The Ultimate Guide to Supply Chain KPIs – Part 1

Once the main production line broke down in a factory, this line was very essential to the company’s revenue.  The managers and engineers in charge couldn’t get the machine on the production line to work again. Finally after giving up, the management agreed to call in an old man who was known to have experience working with similar machines.
He walks into the factory, takes one look at the machine, grabs a hammer and hits the machine once, the machine starts right up. He leaves and the company is making money again.
The next day the company received a bill from the old man for $10,000. They refused to pay and asked for an itemized bill instead. The old man agreed that this was a fair request and complied.

The new itemized bill read….

Hammer:  $5

Knowing where to hit the machine with hammer: $9995.

Not knowing where to hit the hammer costs companies globally billions of dollars in losses. Not knowing where to direct the limited amount of resources and energies of an organization can be the difference between profit and loss.
Key performance indicators (KPIs) are vital management tools which help decision makers understand the performance of all important dimensions of their organization’s performance.
KPIs are tools which help in giving the bigger picture but only if the right KPIs are recorded and monitored. Peter Drucker once said, “Results of an organization are always outside that organization and not within.” Similarly KPIs selected by management should be reflective of the results an organization is aspiring to achieve. KPIs to measure a department or an organization’s success have to be decided by and agreed with the top management and communicated all the way down the organization to ensure an organization that works as a cohesive unit.

This post would discuss Operational and Manufacturing KPIs which can help operations managers to quickly assess the health of their department.

1. Six Sigma Level: Defects per Million Opportunities (DPMO)
   DPMO helps in understanding the process limitations and which quality issues would reduce waste and improve the process. It helps in assessing the quality level of the process.

   

   The table below indicates levels of Sigma performance based upon the DPMO level.

   DPMO	Sigma Level	% Error
   691,500	1	69.15
   308,500	2	30.85
   66,800	3	6.68
   6,200	4	0.62
   230	5	0.00023
   3.4	6	0.000034

   
   

2. Capacity utilization rate (CUR):
   Every production facility tries to utilize equipment to its maximum potential in the minimum amount of time. This is necessary to produce products and deliver services for customers.
   CUR is often measured daily or weekly.
   Data for the CUR KPI comes from the internal processes system that tracks the amount of work or output in a certain amount of time.
   This KPI is clearly indicates the extent to which the production potential is being utilized and to what extent production can be increased without increasing unit cost.
   
3. Process Waste Control:
   The most effective way for an organization to increase profitability is to decrease waste. Decreasing waste is in the organizations internal control whereas increasing market share and sales is dependent upon external factors.
   Toyota Production System identifies seven types of waste:
   1. Transportation: Unnecessary movement of parts, materials between processes.
   2. Motion: Unnecessary movement of workers or machines.
   3. Inventory: Excess in raw material, work in progress or finished goods.
   4. Waiting: waiting for parts, material or systems.
   5. Over-production: Producing more than necessary.
   6. Over-processing: Doing work that is unnecessary.
   7. Defects: Anything that the customer would reject.

      This KPI indicates how lean and effective are the processes.

4. Order fulfillment cycle time (OFCT):
   This KPI measures the agility of end-to-end business operations. How quickly are customer orders delivered.

   
   

5. Delivery in full, on time (DIFOT) rate:
   This KPI measures delivery reliability and that the products are flowing through the whole supply chain efficiently and on time.
   
   
6. Inventory shrinkage rate (ISR):
   Inventory shrinkage refers to the loss of products between the point where a product is produced and the point where it is sold.