Published on Nov 30, 2023
This paper attempts to track key performance indicators (KPIs) in order to figure out the performance of the Supply Chain in the retail sector. It also focuses on inventory replenishment strategies and capacity utilization in the retail sector.
In recent years, this sector has spent considerable amount of time and money trying to improve its operations in such a way so as to respond efficiently to customers' needs. This has led to several developments like the introduction of automated store ordering, usage of RFID and etc.
The KPIs helps in directly analyzing the performance of every specific activity and operation and hence also helps in zeroing down to the exact root of the problem, if any, and thus helps the managers to rectify them. The Improvement Opportunities are further explained in detail for achieving a better performance. The KPIs are segregated into different categories accordingly as follows:
Supply Chain and Logistics: The network of retailers, distributors, transporters, storage facilities and suppliers that participate in the sale, delivery and production of a particular product.
. % of time spent picking back orders: Number of hours spent on picking back orders as a percentage of working hours.
. Sales order by FTE : This indicator measures the number of customer orders that are processed by full time employees per day. This helps evaluate the workforce cost per order.
. Scrap (or leftover) value %: Scrap (or leftover) value as a percentage of production value.
. Inventory Accuracy: Most Advanced Planning Systems calculate net inventory requirements. If the book inventory used as the basis for these calculations has a high error, the net inventory requirements generated will not reflect the true inventory needs. The inventory error should be factored into the safety stock calculation to protect service levels from variance in inventory due to inventory count accuracy. Key Performance Indicators
. Inventory Carrying Costs: Inventory Carrying Cost = Inventory Carrying Rate x Average Inventory Value
. Inventory Carrying Rate: This can best be explained by the example below
1. Add up annual Inventory Costs: Example: Storage =Rs800k, Handling= Rs400k, Obsolescence =Rs600k, Damage= Rs800k, Administrative= Rs600k, Loss (pilferage etc)= Rs200k. Hence Total=Rs3,400k
2. Divide the Inventory Costs by the Average Inventory Value: Example: Rs3,400k / Rs34,000k = 10%
3. Add: Opportunity Cost of Capital (the return you could reasonably expect if you used the money elsewhere) = 9%, Insurance =4%, Taxes= 6%. Hence, total= 19%
4. Add the percentages: 10% + 19% = 29%. The Inventory Carrying Rate = 29%
. Missed Deliveries per Million (MPM): Measures supplier on time delivery by part reference ordered using the same logic as the quality measure PPM.
Several missed categories are defined such as ; Missing part reference, undershipped, overshipped, delivery window missed etc.
MPM = (Total number of missed deliveries / Total number of part references ordered) x 1,000,000
. Delivery Schedule Adherence (DSA): Delivery Schedule adherence (DSA) is a business metric used to calculate the timeliness of deliveries from suppliers. Delivery schedule adherence is calculated by dividing the number of on time deliveries in a period by the total number of deliveries made. The result is then multiplied by 100 and expressed as a percentage.
. Customer order promised cycle time: The anticipated or agreed upon cycle time of a Purchase Order. It is gap between the Purchase Order Creation Date and the Requested Delivery Date. This tells you the cycle time that you should expect (NOT the actual).
. Inventory replenishment cycle time: Measure of the Manufacturing Cycle Time plus the time included to deploy the product to the appropriate distribution center.
. Material value add : Sell price minus material cost divided by material cost.
. Supply chain cycle time: The total time it would take to satisfy a customer order if all inventory levels were 0.
. Fill Rate: The number of items ordered compared with items shipped. Fill rate can be calculated on a line item, SKU, case or value basis.
. On time ship rate: What percent of orders where shipped on or before the requested ship date. On time ship rate can be calculated on a line item, SKU, case or value basis.
. Perfect Order Measure / Fulfillment: The error-free rate of each stage of an order. Error rates are captured at each stage (order entry, picking, delivery, shipped without damage, invoiced correctly) and multiplied together.
. Customer order cycle time: The average time it takes to fill a customer order.
. % of backorders: The number (or percentage) of unfulfilled orders. Inventory: Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials.
. Independent demand ratio: For manufacturers that also supply replacement parts and consumables this metric helps to define the % mix of demand for an item from independent (outside sources) vs dependent (inside sources). The ratio is calculated by dividing the unit usage for customer orders by the total unit usage of the item from all sources (work orders, sales samples, destructive testing, inventory adjustments, etc.)
. Early receipts to MRP date (required date): Early receipts to MRP date - This is a measure on your Planning efficiencies. Some planners or warehouse personnel may request that the material be brought in long before the plant/operators need the parts. Reasons for doing so may be quality, lead time variance, buffer stock etc. Early receipts to MRP produce higher levels of inventory that are not required yet. In a way, this is at the other end of the scale than JIT. Measure: MRP due date vs Receive to Dock (stores) date.
. Early PO Receipts to PO due date: Early receipts to PO date - This is a measure on your suppliers and their diligence to supply per the contract date. Early receipts to PO produce unexpected deliveries turning up, congested goods inwards and of course higher that projected inventory levels. Measure: PO due date vs Receive to Dock (stores) date.
SCOR: The Supply-Chain Operations Reference-model (SCOR) is a process reference model that has been developed and endorsed by the Supply-Chain Council as the cross-industry standard diagnostic tool for supply-chain management. SCOR enables users to address, improve, and communicate supply-chain management practices within and between all interested parties.
. Order fulfillment cycle time: Order Fulfillment Cycle Time is a continuous measurement defined as the amount of time from customer authorization of a sales order to the customer receipt of product.
. Total supply chain management cost: Total Supply Chain Management Cost is a discrete measurement defined as the fixed and operational costs associated with the Plan, Source, Make, and Deliver supply chain processes.
. Upside supply chain flexibility: Upside Supply Chain Flexibility is a discrete measurement defined as the amount of time it takes a supply chain to respond to an unplanned 20% increase in demand without service or cost penalty.
. Direct Product Cost: Sum of costs associated with manufacturing a specific product.
. Direct Labor Cost: Sum of costs associated with payment of the employee insurances, taxes etc.
. Direct Material Cost: Sum of costs associated with acquisition of support material.
. Time needed to recruit/hire/train additional labor: Amount of time required to achieve a certain substantial improvement concerning the number of employees.
Cash Conversion Cycle (CCC): A metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties. .
Also known as "cash cycle". Calculated as: CCC = DIO + DSO - DPO Where: DIO represents days inventory outstanding, DSO represents days sales outstanding, DPO represents days payable outstanding. Usually a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and cash recovery. This cycle is extremely important for retailers and similar businesses. This measure illustrates how quickly a company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company's bottom line.
Marketing Research: Text and Cases,by Dr. RAJENDRA NARGUNDKAR.
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