Inventory and Warehousing Metrics

Efficient supply chain and inventory strategy allows the company management to define goals, refine methods and increase profits.

Performance measurement is critical to achieving excellence and providing a solid platform on which to build superior supply chain capabilities. Meaningful performance metrics have particular characteristics. They must be timely, accurate, and easy to understand. Efficient metrics must be uniform across the whole organization and use common terminology. Besides, they must be multi-dimensional - targeted to the "hot spots" and, ideally, can be displayed graphically.

Accurate and timely demand metrics are a vital component of an effective supply chain. Supply chain metrics have three major perspectives: Supply perspective, Customer perspective, and Inventory perspective. Customer metrics may include the following measurements: "order fill rates", "fill ratio," "service level", and "customer service rate". In general, Customer metrics answer the following question: How efficient are the company's customer services" The customer metric can be expressed as a percentage: Customer orders shipped on time divided by the total customer orders.

Supply metrics are required for creating efficient demand forecasts. Forecast accuracy is required for the proper allocation of resources, including the operations capital and strategic assets. Inaccurate forecasts often cause supply imbalances which could ultimately result in inferior customer service and bloated inventories. The Supply metrics often reflect the Customer metrics: for instance, a percentage showing the number of purchase orders received on time divided by the total purchase orders.

Inventory measurement and analysis are the most important aspect of supply chain strategy because inventory is usually the company's largest balance-sheet asset. The knowledge of standard inventory metrics is key to protecting this asset.

Traditionally, companies have only measured operational performance indicators, such as cycle times and inventory levels. Benchmarking these data, however, is critical to having actionable information.

Developing a comprehensive inventory strategy involves a number of departments - including fulfillment, marketing, and merchandising - as well as inventory control. Inventory planning is based on a wide range of measurements, including Storage efficiency (Inventory turnover rate, Inventory Levels, Space Utilization), Process effectiveness (Part Count Accuracy, Days of Supply, Lead time, Obsolescence and Deterioration) and Non-Conformance analysis (Pilferage and spoilage, Price of Non-Conformance (PONC), Target PONC improvement, Quality-Percentage Defect), Customer satisfaction level (Return rate, Cancellation rate), and Financial perspective metrics (Insurance, Gross margin Return on Investment, Average Cost per Order, Lost Sales Analysis, etc.).

According to the AMR research, companies that forecast demand more accurately have 15 percent less inventory, 17 percent better "perfect order" ratings, and 35 percent shorter cash-to-cash cycle times than their peers. While there are clearly many factors that affect bottom-line financial performance, most research show that companies that do a superior job of fulfilling customers' needs-as evidenced by the perfect order-tend to have higher earnings per share (EPS), better return on assets (ROA), and heftier profit margins.

In an increasingly competitive, complex, and demand-driven environment, superior supply chain capabilities are critical to success. Continual diagnosis of the company's supply chain and inventory health is key to achieving and sustaining supply chain superiority. Once you have an accurate and comprehensive view of your supply chain, you are on your way to establishing a bulletproof plan for continuous improvement.

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