Inventory Key Performance Indicators (KPI)

THE HIERARCHY OF SUPPLY CHAIN METRICS

The process where trade-offs between supply chain metrics are perhaps the most apparent is S&OP. It is where decisions must be made to balance supply chain costs, cash, and delivery performance to achieve profitability and service targets [1]. The aspect of trade-off resolution, which is a recurring theme in supply chain decision-making, emphasizes the interconnectedness of metrics and the fact that they cannot be managed in isolation, but must be seen in relation to one another. Inventory metrics are no exception. In fact, they are especially important as they provide a link between supply chain activity (through working capital) and a company’s financial statements [2].

 

Therefore, to embed inventory metrics in an interconnected set of supply chain metrics that are linked in a causal chain that leads up to top-level metrics such as total supply chain cost and perfect order requires a performance management framework. One that makes the interconnectedness between metrics transparent and further helps resolve trade-offs in a manner that is consistent with overarching business goals. Gartner’s hierarchy of supply chain metrics is one such approach to performance management that addresses this issue by providing a template emphasizing the importance of having an aligned set of metrics. 

 

THE THREE LEVELS IN THE METRICS HIERARCHY AND THEIR USE

In the general-purpose template that Gartner provides (see Figure 3), which can be adapted depending on industry and other client-specifics, the metrics are placed in a hierarchy that is grouped into three tiers—if a top-tier summary metric shows un-satisfactory performance, connected diagnostic metrics in the middle-tier can be looked at to help with root-cause analysis leading to corrections that are first felt at the level of ground-level operational metrics.

 

Taking an example in the inventory context, below-par performance on an assessment metric “SCM cost” might lead to a diagnosis that uncovers below-par performance in “Inventory” (total inventory), and perhaps corrective actions to reduce “Raw Material Inventory”, which seems to be contributing most to the poor overall inventory performance. 

 

Figure 3: Inventory Metrics in a Metrics Hierarchy (Source: Gartner[3])
Figure 3: Inventory Metrics in a Metrics Hierarchy (Source: Gartner[3])

THE MOST IMPORTANT INVENTORY METRICS IN THE HIERARCHY

 

To summarize, the key inventory-related metrics in the hierarchy are (see Figure 3):

  • “Cash to Cash”, which is a time metric that measures the time it takes for the cash to flow through the supply chain, is a composite metric that consists of (all measured in days):
    • Accounts Payable
    • Inventory (includes finished goods, raw material, and work-in-progress)
    • Accounts Receivable
  • Raw Material Inventory (turns, and value)
  • Work-in-Progress Inventory Value (turns, and value)
  • Finished Goods Inventory (turns and value)

 

One way of monitoring these inventory metrics in the supply chain and generating exception messages when predefined threshold values are exceeded or fallen short of, as well as entering into the root cause analysis from there, are so-called Supply Chain Control Tower (SCCT) solutions, as described under SAP IBP - Supply Chain Control Tower.

 

Solutions for monitoring supply chain KPIs

[1] Spooner, M. and Hofman, D., 2016. Using Supply Chain Metrics In The S&OP Process. [online] Gartner. Available at: <https://www.gartner.com/en/documents/3232317/using-supply-chain-metrics-in-the-s-op-process> [Accessed 11 May 2020].

[2] Hofman, D., 2015. The Hierarchy Of Supply Chain Metrics: Diagnosing Your Supply Chain Health. [online] Gartner. Available at: <https://www.gartner.com/en/documents/3083323/the-hierarchy-of-supply-chain-metrics-diagnosing-your-su> [Accessed 11 May 2020].

[3] Spooner, M. and Hofman, D., 2016. Using Supply Chain Metrics In The S&OP Process. [online] Gartner. Available at: <https://www.gartner.com/en/documents/3232317/using-supply-chain-metrics-in-the-s-op-process> [Accessed 11 May 2020].