5 Metrics We Hate

Randall Schaefer CPIM

Deb Smith CFPIM, CIRM, CSCP

1

What is a Metric?

a criterion

a standard

a measure

to evaluate performance and reinforce company values

2

Our Perspective

We believe some common SCM metrics are

misused, misaligned, misunderstood or

just plain worthless

Today’s examples • Inventory turns

• PPV

• Shipping schedule attainment

• Capacity

• Cycle count reporting

3

Inventory Turns

annual cost of goods sold

÷ average inventory $

Compare similar companies and measure internal trends

and goal attainment

So what’s wrong with this metric?

4

It’s Meaningless! … too many assumptions

• We assume less inventory is better

• Assumes all inventory is equal; obsolete, slow moving, build ahead, banks

• Assumes inventory exists in a vacuum; does not consider strategy or S&OP plans

• We make SCM responsible for increasing the turns and assume they can affect all the inventory

What’s the alternative?

5

The Alternative

Define who “owns” the various types of inventory • FG – whoever develops the forecast (usually Sales or Marketing)

• Purchased material – Purchasing

• WIP – Operations

• Obsolescence – Who caused it?

• Safety Stock – Who decides how much? Why? Uncertainty in

demand and/or supply

• On hold, awaiting disposition, rejects, pending rework – Who’s

responsible for initiating action?

6

The Alternative

Report inventory turns by “owner”

How do we achieve improvement?

Define ownership

Develop goals for each type of inventory

Align accountability metrics with goals

7

Improving

Each owner drives lot sizes towards one and leadtimes towards zero,

starting with ‘A’ items

Will likely reduce inventory but that’s not the goal

Goal: optimize lot sizes and leadtimes for every item

Achieve optimal inventory for every item

Will also reduce complexity and simplify planning and production

processes

8

So…

If we follow this plan, whatever the inventory

turns is, it’s the right one…

for now

Today’s optimal inventory will change as owners drive

lot sizes towards one and leadtimes towards zero

9

Purchase Price Variance

Question:

By what methods may a company achieve

favorable PPV?

10

Purchase Price Variance

Question:

Are there perverse incentives to

manipulate the PPV?

11

Purchase Price Variance

We don’t like the potential subversions… • Who sets the cost standard?

• What are the cost standards based on… lot size, leadtime,

commitment horizon?

• Does spot buying for cost come at the expense of quality?

• Does favorable PPV come at the expense of customer service

and flexibility?

• Is transportation cost included in the item cost?

12

Purchase Price Variance

PPV is important for cost-driven companies

BUT

Low cost is the goal… not favorable

variance against a standard

Caution:

low cost may not be the goal if the business

competes on image, delivery, quality, flexibility, variety…

13

Purchase Price Variance

For companies whose strategy is not lowest

cost, a focus on PPV may be

counterproductive

For companies whose strategy is

lowest cost, must eliminate potential

perverse incentives

14

Purchase Price Variance

In the presence of perverse incentives,

PPV gives the appearance of cost

improvement at the expense of real

improvement

15

Shipping Schedule Attainment

What we don’t like:

Are we measuring operations performance? • quality problems

• raw material delivery

• tooling

• staffing/training

• capacity

OR…

16

Shipping Schedule Attainment

Are we measuring promise performance?

• leadtime

• forecast/safety stock

17

Shipping Schedule Attainment

Regardless of whether we measure

operations or promise performance

Shipping Schedule Attainment tells us

nothing until it’s too late!

18

Shipping Schedule Attainment

At this point the metric is often only

used punitively

Determining what went wrong requires

dependable memories and willingness to

investigate the past, determine causes and make changes

And it’s still too late

19

Shipping Schedule Attainment

We need to know production is behind schedule

before it’s too late to do something about it

Instead, focus on contributing metrics:

• raw material delivery schedule attainment

• tooling availability

• trained workforce

• component/assembly schedule attainment

• anything else that delays/limits production

20

Shipping Schedule Attainment

Shipping on time is just luck if contributing

processes are late or resources unavailable

Focus on contributing metrics and watch

your shipping schedule attainment

improve!

21

Capacity

Do most companies have a capacity strategy?

If they do, do they have appropriate capacity

metrics?

If they do, do they have consensus on

required and available capacity?

22

Capacity

Without a capacity strategy, there are no appropriate capacity metrics

Capacity Strategies (aligned with business strategy)

• Advance

• Incremental

• Wait-and-See

23

Capacity

Align metrics with strategy

Examples:

Advance strategy – measure available capacity

Wait-and-See – measure utilization

24

Capacity

How do we know how much capacity we

have (available)?

How do we know how much capacity we will

need (required)?

Do we all agree?

25

Capacity

Available Capacity

Easy to determine in a lean/flow environment; not

so easy in other environments

Available capacity =

efficiency x utilization x time available

Each factor requires interpretation and agreement

26

Capacity

Required Capacity

Easier to determine in a lean/flow environment,

just calculate takt time

Required capacity =

Setup + (qty. x run time/unit)

Each factor requires interpretation and agreement

27

Consensus Capacity Analysis Report

(100%)

Hours Req. at Hours Required at Various Effectiveness

Workcenter Avail. Standard 90% 80% 70% 60% 50%

LRGPRS 4000 4500 5000 5625 6429 7500 9000

SMLPRS 4000 2000 2222 2500 2857 3333 4000

SUBASM 3000 2500 2777 3125 3571 4167 5000

Arrive at consensus

Develop metrics based on the consensus

28

Cycle Count Reporting

What we don’t like:

The purpose of cycle counting is not universally understood

The purpose is to find and resolve the causes of variances

It’s a form of process control

29

Cycle Count Reporting

The causes of count variances are seldom

resolved because there are too many of them

• We fail to fix known causes of inventory inaccuracy before starting

• We fail to identify parts inappropriate to count before starting

• Cycle count programs do not allocate sufficient staffing to analyze

and resolve the variances

• We fail to assign responsibility for inventory accuracy

30

Cycle Count Reporting

Result:

• Only point-in-time corrections to balances

• Metrics measure only the number of counts and

adjustments

(without overtime)

Real Focus: measure the success rate for

identifying and resolving causes

31

Cycle Count Reporting

Getting it right…

• Eliminate the known causes of variances

• Remove inappropriate parts from cycle counting

• Provide adequate staffing to both count and

analyze variances

• Assign responsibility for inventory accuracy

• Develop metrics for identification and elimination

of the causes of variances

32

Conclusion

Too many metrics either don’t get you

where you want to go…

or

may even prevent you from getting there

Metrics:

don’t hate ‘em

fix ‘em

33