Why does that matter?

Often we talk about supply chain metrics or KPI ( Key performance indicators) without explaining the purpose or reason we measure them and watch them.

On a daily basis we often push a number or percentage and tell people to watch them, but the most common question we get is.... 

Why does that matter? 

So to help you along today here a few simple metrics/indicators and why they matter. 

In addition since many the of the metrics don't really explain what is good or what is bad we can look at some of the different types of graphs to help us see a trend and figure out how to correct or react. 

While some of this data may be readily available in your ERP/Business management system, if not you can always start with a spreadsheet or a piece of paper. 

As the saying goes, "If you can not measure it, you can not improve it." - Lord Kelvin 

Cash Conversion Cycle 

In it's simplest form , how long does it take for your money to make money. 

Take the Invoice Payment Date from your vendor and the Cash Receipt Date from your Customer. The Number of days between the two is your cash conversion cycle. 

In most distribution companies this is not always that simple as you may purchase and pay for a case of gloves but sell them by the box. So the most common way to normalize or make the number meaningful is to use an average of the days rather then a single transaction. 

What is is supposed to look like?  While it can vary universally every agrees a lower number is better. Anything under 30 days is excellent but most companies who hold inventory hover around 80-100 days

Why it matters? The shorter your cycle time to the more money you will have to buy more inventory and sell more etc. It basically going to decrease the amount of operating capital or money you need to expand you business. 

Instead of looking to more funding to expand the business look at ways to shorten the cycle time. Credit cards, ACH payments, Cash discount for quick payments. 

These are all tools to help the cash conversion cycle and can speed up payments on the consumer side as well as the purchase side. 

Inventory Days/Weeks of Supply

This is the  number of days it would take to run out of supply if it was not replenished.

It is calculated as inventory on hand / average daily usage.  Inventory Management seeks to minimize inventory days of supply in order to reduce the risks of excess and obsolete inventory. 

What is is supposed to look like?  

In most distribution operations a 1-2 month spread is typical or 30-60 days on hand. 

Why it matters? 

Excess inventory tends to tie up  cash flow. Why let the money sit in inventory in the warehouse , typically inventory like a car will lose value while sitting in the warehouse and the more you reduce the inventory you are keeping the less cash you will have sitting in the warehouse. and the more you will have to operate and grow your business. 

Using an effective inventory management solution can yield more cash to help your run the business. 

Fill Rate

While their are many arguments over what goes into the fill rate  starting with a simple calculation that can be tweaked is suggested when starting the process. 

For now lets assume the fill rate is the percentage of a customer's order that is filled on the first shipment. 

This can be represented as the percentage of items, SKUs or order value that is included with the first shipment. 

(1 - ((total items - shipped items) / total items)) * 100 

What is is supposed to look like?  

While again i can vary form company to company the floor or bottom value we see if usually around 93% or 94%   if you are not there then you either need to increase inventory 

or review customer order patterns to match them up better with your purchasing and delivery schedule. 

Why it matters? 

Fill rate is typically the most quoted metric to match with customer satisfaction and is a good measurement of efficiency for your company as it involves a number of areas. 

Tools to improve your fill rate can be inventory management, customer usage analysis and possibly customer commitments. Often a client/customer will commit to purchasing a specific quantity for you or allow you to do strategic planning with them so that the fill rate matches to their expectations. 

These measurements or metrics allow you to simplify your review processes and by understanding the reasons behind why each one matters you can help others in the company understand the concept of a KPI or Metric and turn those into measurable results to help drive your business. 

For more information on TSH or MDS call The Systems House, Inc. at 1-800- MDS-5556. Or send a message to sales@tshinc.com

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