Maximizing Efficiency and Meeting Customer Needs: The Importance of Using Metrics That Matter in Supply Chain Management

Companies should invest in utilizing metrics that are truly meaningful and relevant to their operations. By doing so, they can optimize their supply chain and make more informed and strategic decisions. Having visibility into the costs and consequences of each decision point in the supply chain allows businesses to anticipate and plan for potential challenges and make informed decisions about how best to serve their customers and stakeholders.

In today’s business environment, there is increased competition and pressure to be more sustainable and socially responsible. Utilizing metrics that genuinely matter allows companies to ensure that they are making the most efficient use of their resources while also meeting the needs of their customers and stakeholders. This is particularly important when it comes to sustainability, as it allows companies to track and measure their progress towards reducing their environmental impact and promoting social responsibility.

By utilizing metrics that matter, companies can gain a competitive edge and stay ahead of the curve. They can make data-driven decisions, identify areas for improvement, and track the impact of their actions. This allows them to continuously improve their operations, increase efficiency, and ultimately drive business growth. Additionally, it helps them to identify and mitigate risks and to be more responsive to the changing demands of the market and society.

Overall, utilizing metrics that matter is crucial for companies to optimize their supply chain, make better decisions and stay competitive in today’s business environment. It enables them to understand the costs and consequences of each decision point, anticipate and plan for potential challenges, track and measure their progress, and make data-driven decisions that drive business growth and sustainability.

Here’s an interview Nick Jonsson from the EGN recently conducted with The Supply Chain Guy about metrics that matter:

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Tim Gray: Certainly. Thank you. I’m the founder of Prophit Systems. I’m also the designer of the Prophit suite of supply chain management tools, and I’m the creator of a program called the Prophit Impact System for supply chain improvement.

Nick Jonsson: All right. Fantastic. I’m looking forward to hearing more about this today. And then the topic, it could perhaps sound quite broad to the listeners, improving supply chains by using metrics that matters. What it’s all about then?

Tim Gray: Yeah, that’s a great question. And it’s probably best summed up by we need to have visibility of the cost and consequences of every decision point in our supply chain. And probably the best analogy I can give is most, most financial metrics and ERP systems have us looking in the rear-view mirror, looking at what happened and forensically accounting for how much money we spent or what our inventory is now. What we need to do to really take control of our supply chain and our future is in fact to raise that line of sight and look ahead and see what the costs and consequences are of what we’re about to do or what we are doing now.

Nick Jonsson: Right. And could you perhaps take us a little bit deeper and mention what would be the three key things that the listeners should be aware about when it comes to improving supply chains by using metrics?

Tim Gray: Yeah, for sure. So this is possibly the easiest way to explain this: We talk about supply chain maturity in a number of levels and businesses that are really struggling. Often we find from a supply chain maturity perspective, they’re in chaos. And when they’re thinking about what to do, it’s all about what now, what’s going to happen to me now? What just happened? And so their line of sight is all about just looking at a very myopic picture about what’s now.

In businesses that are a little bit more mature, and a lot of businesses fall into this area, we call them reacting, they are level two, and they are thinking about what’s next. They’re looking at their order book. And so they’ve got a little bit of foresight, but mainly they’re looking at their schedule, and perhaps it’s going to a dispatch plan for what they’re going to do today and tomorrow. But they’re not looking out past the current order book.

And then the next level and what for a lot of businesses has been good enough. The level three is planning. They’re actually planning to serve. And so at that point, they’re actually starting to look further out. They’ve got a forecast and they can see what the customers might want and they are planning to serve.

And so, like I said, for a lot of businesses, this has been good enough,  but there’s a higher level above that. But until recently, most businesses haven’t been worried about it. But more and more, we’re seeing a need to get into the optimized or dominated space. Level four. And the problem with level three businesses is although they’ve started to raise their line of sight, they still can’t look ahead and see what their customers want.

If you’re planning to serve, you can’t see the cost to serve. It’s as if you’re going to serve your customers at any cost. And most manufacturers simply do not have enough margin to be able to serve the customers at any cost. So more and more we’re seeing, particularly with some of the volatility in supply chain recently, the ability to serve your customers at the best possible cost has become paramount.

And that requires not just foresight in terms of being able to see what your customers need, we also need to have the same forward visibility about what is my distribution going to cost, what if I hold stock here or an alternative or if I can get more expensive material but on a shorter lead time? Is that a better choice for me? And being able to see these costs and consequences of these choices immediately and transparently allows you to not just plan to serve, but really navigate the supply terrain so that you can satisfy your customers at the best possible cost.

And that transition through those maturities is the difference between businesses looking in the rear vision mirror and slowly, gradually lifting their line of sight and then finally and slowly getting to raise the line of sight so all decisions are made forward looking, so that they can build up a complete picture of what it’s going to mean to their business and their customers and their cost to serve.

Nick Jonsson: Right. And you touched here, Tim, on cost saving, cost efficiencies and so on. Budgets perhaps are more scrutinized than ever before. There’s also more things we need to spend money on. I’ve had ppreviously some leaders here on the show talking about diversity and inclusion. They’re also talking about the need for allocating budgets to sustainability and so on.

So, you know, why should companies spend resources on this to use metrics that matter and so on. Can you give us some enlightenment here and why should we bother about this?

Tim Gray: Yeah, it’s an excellent question. And you’re absolutely right. There’s a lot of competition and need. But I think possibly the best explanation has been recently we’ve seen companies have been wrestling with COVID related issues. We’ve seen what happens when there’s disruption in supply. And a common theme has been we’ve run out of inventory when supply was lumpy.

So we’ve gone and started getting material at any cost to keep your manufacturing sites running and the customer satisfied. And now with economic problems ahead, we’re seeing that the sustained spend of the last couple of years has started suddenly and dramatically drawn up. And there are a lot of businesses that we’re working with or starting to work with have seen they’re out of cash flow.

And because they’ve got so much inventory now to to buffer against shipping and the availability of materials, they’re actually swimming in inventory. Warehouses are overloaded. They’re short on cash because they’ve got too much stock. And this situation, well it’s understandable how it has occurred. It happened because we’ve been making decisions without the right insights. And if you don’t have cash flow, you can’t really afford to go in and find ethical supply lines or more sustainable avenues unless they fit within your cash constraints.

To me, regardless of how ethically or sustainably you want your supply chain to be, you must first be able to understand the flow requirements. And when you’re purchasing, you must see not just what the price is, but also how long is it going to sit on the shelf for and how long until I need to order again?

And unless you can see all these things, why are you making the decisions you are? Make the right choices regardless of where it’s at, regardless of ticking the other boxes that you’re making in terms of supply chain considerations.

Nick Jonsson: Right. And you’ve mentioned here that Bob’s there holding over supply, but I also hear at the same time equal amounts of people are telling me that they are under supply, that they cannot get enough stock. And just back from KLA now, we had some meeting with manufacturers there earlier this week and they’re saying, you know, they just cannot get supply.

So it goes both ways. And this comes back into forecasting, I guess. Tim, what’s your take on this? It goes both ways. Yeah, right.

Tim Gray: Yeah. Look, you’re absolutely right. The boom work is still occurring. So while in some areas you’ve got massive oversupply now, but that’s in response to they reacted early and reserved capacity and other places were a little bit more cautious. Again, they weren’t running with enough foresight and now the music has stopped. There’s no backup left, so they’re still struggling to get material.

Their response, unfortunately, will be to buy too much. And again, we need that foresight to see what we truly need and when, and what other choices we’ve got to navigate. One of the reports that McKinsey’s recently released which I found fascinating was suggested that only 25% of manufacturers are using tools to plan. 75% of manufacturers are still planning on spreadsheets. And I know there’s some very, very good people who can make impressive spreadsheets, but you cannot integrate the masterly energies of your whole team in purchasing, from supply planning, demand planning and everyone in between in manufacturing and and so on, on Excel. You just can’t keep everyone integrated and working with clarity and conviction. And so having the right tools in place and having the right transparency through your organization is part of an end to end visibility, and part of having the right foundation.

So you can start showing what the costs and consequences are all the way through the supply chain. There really is no other way of getting out of this. The lumpy supply that you just referred to and the stock outs that occur, the other stocks that are in question will remain unless you can see what your true demand is, what what your current coverage looks like in terms of time coverage. And you can see the cost and consequences of what happens if I just buy another week’s worth of stock and then wait and see or whatever, about two weeks or four weeks or eight weeks. And if you can see the consequences for your supply chain, then you can start modelling and managing for it. And then you still need to take that risk assessment, but you’re doing it fully informed, and this is not what happens in almost all cases at the moment.

And businesses that don’t have the right metrics and don’t have that forward visibility are leaving people in the corner who are responsible for making sure they don’t run out of stock, and are just told to make sure you don’t run out of stock and they get their bums kicked if they run out of stock. But no one tells them, you know, hey, you ordered too much. Or by the way, we’ve changed. We’re not using that material anymore. We’re using something else. And these people being allocated the responsibility of keeping the lines running or that the customer’s satisfied with the visibility without the ownership and the transparency of the other interacting issues, is a recipe for failure. And they’re going to continually get caught out or be overstocked with the wrong products if we don’t give them the tools and visibility to be able to manage their scope.

Nick Jonsson: And while in their team, I can see this picture clearly. I mean, there’s so much uncertainties out there now. This recession sprouts depressions around the corner. There’s wars. We don’t know where they’re going to turn. It’s turmoil at every single corner. So, yeah, working with spreadsheets doesn’t really make the cut, does it then? And I can start to understand here what you’re talking about that can really lead to a competitive edge for a company, can it?

Tim Gray: It really can. And it’s interesting, some clients, particularly early in COVID and some inquiries we had were people telling me we can’t possibly budget, who could budget in this environment? And I was pulling my hair out when I heard that, I had to take a deep breath. And it’s like, you know, the more uncertain it is, the more urgent it is that you budget and get everyone aligned or get a consensus going.

And if you’re unsure, you know, if you’re driving at night, you wouldn’t turn your lights off because you don’t have complete visibility. I turn on all the lights I can and I want to look more frequently at the windscreen. Even if we’re forecasting during volatile times, we must forecast more frequently, do our best and understand it may not be perfect.

But doing our best guess and refining it regularly and rapidly and by exception is far more potent than driving blind. It’s absolutely essential that we get our business into a rhythm of our forecasting, not just the demand that’s there in the first place, but also the capacity through supply and all the way down the supply chain, up and down the supply chain so you can have the fastest access to the best information that you can get.

This is really imperative and it’s a business process. It’s not intuitive to a lot of people, but the successful clients that are navigating these tumultuous times are doing exactly that. They’re looking, making it. They’re not overworking their forecasts, but they’re doing them rapidly and frequently.

Nick Jonsson: Right. And we’re coming here to the end today theme. But it’s a very, very interesting topic. And I want to just ask you, what would it mean to a business if they could serve the customer seamlessly and at the best possible cost? How would this then affect the business for them?

Tim Gray: The notion of serving your customers seamlessly is just so far different to what most people at manufacturing or distribution businesses realize. And we liken it to your ability to exhale after a hard day at work. It’s the ability to know that you’ve got the right stuff in the right place and if you’ve got issues you know which ones they are and you’re managing those but being ahead of the game, seeing what’s happening before you run customers out and talking to them about issues that you might have and navigating with them. Most customers are very, very amenable if you can tell them early, we’ve got supply issues. No customer likes it when you bring up after you’ve missed the second delivery that you promise that we’re going to get something and you have to tell them no, we still don’t have it. Being able to see into the future and predict and communicate avoids that.

You can normally manage your customers and that’s when a few exceptions where you do have problems, you normally find a way through with your customers because everyone’s in the same boat. We all understand what disrupted supply chains are like, and I think we’ve all had a rude shock of some of the good times that we had in the past.

So what we’ve seen is that customers, our old customers who have really embraced this agile and frequent planning and the ability to see into the future, they have absolutely clarity to the marketplace. We’re seeing significant market share switching to customers that previously may have charged more money for their products or for other reasons they didn’t have market share. We’re finding that service level that they’re able to offer is guaranteeing them volume and they’re able to to kind of to pick and choose which clients they want because some of their competitors just aren’t able to to supply.

So it’s a very opportunistic time. If you can keep your customers in your supply chain running by looking ahead and navigating the terrain and keep your customers seamlessly satisfied, you actually get to choose. And in this current environment, you get to choose which customers you want and at what margin you’re going to satisfy them all. And really test some of the previous assumptions.

So it’s safe for us to say it’s an absolute recipe for success if you’ve got your supply chain running well, or if you quickly respond to the supply chain well, as those that aren’t they might not have much of a business left.

Nick Jonsson: Right. Well, thank you so much, Tim. It’s been very interesting to have you on the show today. And if the listeners want to continue this conversation with you, what’s the best way for them to contact you.

Tim Gray: That they’re welcome to hit up our website at ProphitSystems.com or email me at consult@ProphitSystems.com. It’s not a spelling mistake like my wife thinks it is – it’s a combination of prophecy and profit – making money. When you can see into the future, you can manage it well and make more money.

Nick Jonsson: So fantastic. Thank you so much Tim, for being with us today. So all the listeners Tim Gray is a supply chain solutions expert and managing director with Prophit Systems and he’s been talking to us about improving supply chains by using the metrics that matters. Thanks again, Tim, and have a great rest of the day.

Tim Gray: Thank you very much Nick, you too.