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Rethinking Supply Chain KPIs (2)

Here are some more thoughts on Supply Chain KPIs (key performance indicators) used in supply chain management, along with my off-the-cuff evaluations of them.

Percentage of shortages in schedule production goods – This metric has some merit but is likely more easily understood as “Number of out-of-stocks leading to production schedule disruptions.”

However, production disruptions on non-constraints (that is, work centers with excess capacity) should have no negative impact on Throughput. The fact of the matter is, although management is frequently loath to recognize or admit it, many non-constraints in a firm’s environment could be deactivated for some period each day—and the employees allowed to play canasta—and the company would make precisely the same amount of money because the capacity-constrained resources (CCRs) would not be starved for production.

I say this to emphasize the fact that the only shortages that really matter are shortages in materials that cause a CCR to halt production (in a given system).

For this reason, shortages should be identified in the buffer, and not wait to be identified when production at a CCR grinds to a halt.

To do this, create a buffer in front of any CCR as depicted in the simple diagram below:

Green |Yellow| Red

The buffer in front of the CCR is a “time buffer,” and (at the outset) is usually set to one-and-a-half or two times the average time it takes for materials to reach the CCR after being released by the Gating Operation (G.O.). In our example, let us say that it takes about three days for materials to reach the CCR after being released to production. So, the buffer length has been set to six days (3 days X 2).

For management purposes, the buffer is then divided into three equal zones designated “green,” “yellow,’ and “red.” Each portion is about two days in length.

Any work released by the G.O. (say, a work order) should be able to be found in green, yellow, or red zone of the buffer as it progresses through the operations that prepare it for the CCR. (In general, we would say, a work order delayed one to two days due to materials shortages is in the “green zone.” A work order delayed three to four days due to shortages is in the “yellow zone,” and a work order delayed beyond four days would be in the “red zone.”)

If a material shortage is discovered, it should be identified early—while the materials shortage is on a work order remaining in the “green” portion of the buffer. Investigation should be undertaken to determine the status of the missing components, and corrective action taken, if necessary.

If the shortage still exists when the work order enters the “yellow” portion of the buffer, expediting should be done to assure the arrival of the materials and work priorities on non-CCRs should be rearranged to allow for immediate processing once the materials in the identified shortage arrive.

If the shortage still exists when the work order enters the “red” zone, all stops should be pulled out to assure that the CCR’s production is not disrupted (if at all possible).

Using the concepts presented above, I would propose a couple of far more effective metrics:

  1. Number of materials shortages (“holes”) in the buffer by zone (green, yellow and red) due to purchasing performance
  2. Throughput-dollars lost at CCRs due to materials shortages stemming from purchasing activity (note: Throughput-dollars lost at CCRs can never be recovered)

NOTE: The causes of shortages (by buffer penetration) and resulting Throughput-dollars lost due to shortages should be analyzed using Pareto methods and corrective actions taken against root causes

If you have questions or comments, we would be delighted to hear from you.

Tags: Supply Chain
Richard Cushing

Written by Richard Cushing

Richard is a Senior Solutions Architect at RKL eSolutions LLC. He is a Certified Demand Driven Planner (CDDP) as recognized by the ISCEA. He also holds various certifications including Sage Certified Consultant on Sage 500 ERP. Richard has over 25 years of practical experience with a variety of information systems, project management, business consulting, enterprise application integration design and deployment.