Financial vs Operational Metrics

There are hundreds of supply chain metrics, many of them ‘standard’ to a degree – order cycle time is a pretty standard metric, though you can tweak the “when” for when the order arrives as well as when the delivery is handed the customer, but most serious supply chain professionals agree on major definitions.

Some organizations use far too many metrics – I recall a Supply Chain re-engineering and ERP implementation I was involved with, which had with 20 operational reports, only two of which were used. The cost to develop was amazing. The flip side is organizations that attempt to guide operations exclusively with financial metrics. An example may be to look exclusively at either total supply chain cost, or perhaps inventory. If you are organized to look at supply chain by P&L only, or worse, by general ledger line, it makes perfect sense to simply set up a metric, and report and try to manage and optimize the supply chain by that financial view. 

The problem is of course that supply chains satisfy customers, not accounting, and they have a different view – they’re worried about cycle times, flexibility, and reliability of delivery. The operations people know this, the closer they are to actually executing processes for the customer the more they focus on that side of the performance view, much to the chagrin of the accounting view.

The approach the best supply chain organizations use is a balanced strategic view – some financials have priorities, some operational kpi’s have priorities – which sets objectives. To then integrate a view of overall performance, however, from an internal view, operational metrics gaps are monetized and combined to look at overall outcome. It’s hard to monetize a cycle time. It is what it is, and its cost is already reflected in total supply chain cost. However, you can monetize a change in cycle time? You can monetize a change in reliability? This is when lean philosophy comes in. Long cycle times involve people waiting, and getting paid to wait. Long cycle times involve inventory, and carrying cost. Low reliability involves multiple shipments. Returns. Multiple status calls, and information. Low flexibility supply chains end up with expedited materials, extra overhead, inventory.

The best organizations build great supply chain metrics reporting system by 1) start top down with strategic priorities, 2) identify the supply chains being measured and 3) then build bottom up operational metrics that link, by supply chain by priorities. They then 4) monetize the changes in performance in operations, to look at the real drivers of top-level performance. So for a given baseline, if my cost goes up, I can attribute it to reliability, cycle time, flexibility, inventory, or product cost changes, and I can see the specifics of contribution. Then the final piece comes in. When you have a delta, you now focus on specific changes that may need to take place, by supply chain, by operational area, to move performance back to baseline, or target. Just reporting financial metrics is fine, from a controller point of view. But it doesn’t help diagnose, or solve operational problems. Bring both together in your supply chain reporting to make it make sense.