Measuring Efficiency of a Supply Chain -II

by Sharad Diwan, Prabir Jana, Prof. A.S. Narag and Dr. Alistair Knox

December 2007

The two part article is based on doctoral research by Prabir Jana at Nottingham Trent University, UK “An Investigation into Indian Apparel and Textile Supply Chain Networks.” In first part we have discussed about need and development of efficiency measurement framework in Apparel Supply Chain and in this second part we will discuss how to calculate each KPI and a case study of practically measuring supply chain efficiency of an apparel manufacturing organization and associated complications and nuances.

Introduction:

In part I we have discussed about the genesis and development of a measurement framework for measuring efficiency of apparel supply chains. Here first we will define and discuss how to calculate each KPI and then we will discuss a case study where we have tried to measure the supply chain performance of ABC Enterprise. ABC enterprise is a $ 15 million enterprise from Northern Capital Region (NCR), India having an ERP system running.

Source

Under this domain in the supply chain we shall consider the sourcing of raw material and consumables for manufacturing of the garment i.e. fabric, trims and accessories and packing material. All the parameters will be considered under three different heads: fabric, trims and accessories and packaging material.

[1] Inward Material Quality:

This parameter shall evaluate the adherence of quality standards of material received from vendors to that specified i.e. deviation from the quality levels agreed between the supplier and the company. Also the material quantity accepted may be equal to the ordered quantity or less. If a lesser quantity is supplied then the penalty will be applied in the vendor lead times. But if the material received is of required quantity but of inferior quality then good quality material is accepted after screening. Also if there is some discrepancy in the quantity stated and actual it will be penalized as case three in this KPI.  

There can be three cases:

                                    :           99-75% accepted         -70 points
                                    :           74-50% accepted         -50 points
                                    :           49-25% accepted         -30 points
                                    Less than 25% accepted           -10 point

Quality parameters shall be considered as a whole for a product and not individual parameters like fastness, weaving defect etc. However if the company has no quality policy for sourcing, this KPI shall not be applicable.

[2] Quantity and Timely Delivery:

This parameter shall evaluate whether the quantity ordered is delivered on time or not for all the materials mentioned earlier. The time to be considered will be a percentage of the lead time of the raw material. However in case of late delivery the penalty shall be according to the % lead time delay and quantity supplied as per matrix below. A percentage of the lead time is being taken as different materials have lead times varying from one to sixty days. Only the quantity and time are considered as quality has been covered in earlier parameter.

The points can be allotted as:

Qty. Rcd. Time delay	100%	99-75%	74-50%	49-25%	>25%
0 %	100	70	50	30	0
Upto 20 %	70	50	30	10	0
21-50 %	50	30	20	0	0
>50 %	0	0	0	0	0
< 20% early	30	40	50	70	80

Moreover if the material was ordered in bulk to be delivered in lots, then the quantity will be taken as cumulative. Higher the KPI, better the efficiency.

[3] Procurement Unit Cost

This parameter shall evaluate the cost incurred to procure the material i.e. the various costs such as correspondence (e-mail, fax, courier, telephone etc.), conveyance (transportation cost of personnel involved in procurement), official’s salary, electricity bills, etc. This can be measured as a ratio between the procurement costs per material to the cost of the material. The transportation costs of material will also be included in the material costs and the material costs would thus be costs of material at site. Also costs incurred in testing of raw material will be added in material cost. (Total procurement cost / total cost of material procured) x 100 = procurement unit cost. KPI is expressed as 100 – procurement unit cost.  Higher the KPI better the procurement efficiency. Data is collected over minimum 6 representative months and averaged. It may be noted that procurement cost incurred in the month of March may arrive at warehouse during April, so data collected for more number of months will give correct measure of this KPI.

[4] Material Inventory Level

This parameter shall evaluate the stocked inventory level of the company. Higher inventory level increases the capital investment and also acquires more physical space. Lower inventory level indicates better sourcing efficiency. The inventory level can be measured as a ratio of daily requirements in volume terms upon average daily inventory stock expressed in percentage.

This KPI is calculated as Inventory Level Stock Ratio i.e. (Issued Stock per day) / (Stock Held per day) expressed as percentage. Higher the KPI better the performance. Data is collected over minimum 6 representative months and averaged.

[5] Vendor Development Capability

This parameter will determine the Sourcing Department’s potential and capability to assist vendor during the product development or in Order processing. Three types of the parameters which need to be checked during the product development are Technological Assistance, Financial Assistance and Timeliness of information and the Extent of information shared for each of the above parameters we need to rate the companies accordingly.

Rating for this KPI will be on a subjective basis. The extent of fulfillment of the above three parameters will be judged and rated as below. Point allocation is also as below.
Very Good =100 points, Good = 070 points, Average = 050 points, Below Average = 030 points and no Development = 000 points

All parameters will be rated differently and an average of the points obtained for the three will give points to be allocated to the KPI.

Plan

The planning function is one of the most important factors in coordination of various pre production, production, post production, activities. Planning drives the supply chain. It orchestrates the flow of materials and resources, getting them to the right location, at the right time, in the right sequence. Effective planning balances demand and supply, internal and external objectives, all in a constantly changing environment. Mastering supply chain planning can provide a major competitive advantage.

[6] Adherence to Production Target

Many times the planned targets are not met due to non availability of raw-material (as raw-material did not arrive on time) or due to decision pending (like fit-approval delays, material quality approval delays). This parameter measures actual production achievement in comparison to planned one. Production achievement is measured in terms of timely completion and fulfillment of target. This KPI measures daily deviation of target production for three departments, namely cutting, sewing and finishing and points are allocated. Cutting schedule is compared with actual cut completion dates and expressed as percentage. Similarly planned sewing and finishing dates for different styles are compared with actual. Data is collected over a minimum of 3 representative months and averaged.

On a scale of 100 points, the points can be allocated as below:
                                    99-75% production (cut, sew or finish) completed -75 points
                                    74-50% production (cut, sew or finish) completed - 50 points
                                    49-25% production (cut, sew or finish) completed - 30 points
                        less  than 25% production (cut, sew or finish) completed - 10 point

Suppose the cutting figure of one month for a company is like below

KPI (cutting target adherence) is (118000) x 100/1400 = 84.28%

Often manufacturers prioritise different customers based on certain parameters, it is understood that to favour one customer the vendor has to compromise with other customer. Due to such circumstances while any customer wants to measure true SC efficiency of any manufacturer the average data over a period of time should be taken into account and not only data pertaining to specific customers’ orders.

[7] Sample conversion rate.

It is the ratio of the no. of styles where a  production order is received upon the no. of styles sample development was done expressed in percentage. Data is collected over a minimum of 4 representative seasons and averaged.

[8] Material Utilisation

Material is required at the right time, right quantity and at right price. Material requirement planning is done by merchandising or planning department and raise a bill of material.  After the material is arrived and consumed its utilization record need to be compiled to determine accuracy of planning (the quantity parameter). Where material had arrived of right quantity at right time, its actual utilization percentage is calculated over a period of 3 months. 100% utilization gets the highest rating and so on. You can cover as many raw material as possible but as fabric is the prime cost factor, fabric utilization percentage only will be calculated under this parameter. KPI is calculated as the actual fabric utilized (for an order) upon the total fabric received (for that order) expressed in percentage.

[9] Cost Adherence

An order is traditionally cost on two aspects: product and process cost.  Costing is done assuming lot of parameters, like material consumption, labour cost, overhead cost etc. and apportioning value against each parameter. Due to unforeseen and unavoidable circumstances actual cost incurred on a order may vary from the planned one. This KPI is the ratio of planned cost upon the actual cost incurred expressed in percentage. Data is collected over a minimum 3 representative months and averaged.

[10] Planned T & A Vs actual T & A

Once an order is received, T&A calendar is prepared to meet the scheduled delivery date and also ensure all activities have a start/completion date. Deviation from the planned date happen due to either inefficiency or incompetence of other departments (e.g. sourcing delay, low productivity in making etc.) or inaccurate planning. Preproduction is crucial activity which includes approval related time spent. Iteration time is generally not planned. This KPI has 4 measurement parameters, namely total iteration time, total approval time and total preproduction time and delivery lead time.
From the date order received, till the date merchandise being shipped out of the factory (or merchandise being shipped/aired out of the country) is commonly referred as delivery lead time. Delivery lead time is the ratio of first (initial) planned lead time upon actual lead time expressed in percentage. Follow appendix for data compilation.

Make

Manufacturing or commonly known as production activities. This domain consists of three major departments namely, cutting, sewing and finishing and many sub departments. While the data pertaining to the sewing department is easily available, data for other departments is difficult to come by.

[11] Capacity utilization

Capacity utilization can be measured by calculating basic minutes utilized upon basic minutes available. In basic minutes utilized we multiply the SAM with quantity for the style produced. Basic minutes available can be calculated by multiplying number of production personnel present (operators + helpers + in line checkers) by the no. of minutes they worked in a shift. The KPI is calculated as minutes utilized upon minutes available, expressed in percentage. Higher the KPI better the capacity utilization.

[12] Production Cost Efficiency

This is basically cost being incurred to run the production, which includes area cost, machine cost, labour cost & overhead cost. It is expressed as rupees spent (invested) per basic minute. Production cost per minute is basically value invested per minute (VIM). Profit margin of product divided by SAM value of the product gives value realized per minute (VRM). This KPI will be calculated as ratio of value realized per minute upon value invested per minute expressed in percentage. Data should be collected over 6 months and averaged out.

[13] Quality Capability

Quality is the important key performance indicator. It can be determined by Defect per Hundred unit (DHU) level. DHU level is the defect per hundred unit calculated at the final stage of each department. For example, in the cutting department it can be calculated at the part checking  or auditing stage, after the cutting and bundling process. Similarly in the sewing department it can be calculated at final checking or audited stage, after the complete sewing of garments from the line. In the finishing department, it can be calculated at final auditing or at final inspection stage.  Data collected for 3 months to be collected and averaged. This KPI can be calculated as (1 / DHU) x 100.  The higher the KPI. the better the quality capability of the organization.

For example, if the production of the sewing department one day is 800, out of which 200 pieces are checked and the DHU is 112, then the KPI is (1/112) x 100 = 0.89 %

[14] Change over Time

Change over of the machinery and equipment results loss of productive time. In garment manufacturing during style changeover and otherwise, there are different reasons where change over time should be taken into account. Work aid changeover, machine layout changeover, style changeover (stitches per inch, thread colour change etc.) allowances should be calculated and added up. The Change Over Time is calculated as upon cumulative changeover time upon (total productive time in a shift x number of machines) expressed in percentage. Thus KPI will be 100 – change over time. Higher the KPI lesser the change over time and better the company performance. Data collected over 3 months should be averaged.

For example suppose total productive time in a day (shift hours – breaks) is 500 minutes, 100 machines on the floor and total cumulative changeover time (all types for all machines are added) is 1000 minutes. KPI is [100 – (1000 x 100)/ (500 x 100)] = 98 %

[15] Operator Training Effectiveness

Here we are calculating the performance of the training cell or effectiveness of operator training. Operators are trained in the training cell to take care of operator turnover in a company.  The training cell should train a higher number of trainees as practical because there is fallout of trainees. This parameter is measured as ratio of annual/monthly trainee incumbent in production floor to annual/monthly operator turnover expressed in percentage. The higher the KPI, the more effective is the training cell.

For example if annual operator turnover for a company with 480 worker is 50%, then annually 240 workers need to be replaced. Capacity of training cell is 25 trained operators per month. On average out of 25 trainee if only 18 chosen to join production floor per month, then KPI would be 18/20 i.e. 90%

Deliver

Delivery of goods is the last but most important domain of activities. Delivery is only accomplished when order is of acceptable quality, full quantity is delivered on time up to customer’s warehouse without drawing any claims and discounts.

[16] On-Time shipment

Shipment at the exporter's end is just the delivery of goods. When the P.O is made for an order, the buyer fixes a favorable date. If these goods are exported by the manufacturer as per scheduled date then it is termed as on - time shipment. While delay in shipment is of great concern and dealt with in this parameter, early shipment is also draws a penalty. This KPI is calculated as (volume or value of orders shipped x weightage points) * 100 / (total volume/value of orders). Higher the KPI better the on-time shipment performance. This parameter is measured on a monthly or yearly basis. KPI calculation can be done either based on volume or value.

[17] Order Fulfillment

For a company, the quantity to be shipped by the manufacturer (as per the Purchase Order) is the order quantity. If the manufacturer ships the exact quantity, then we call it as an order fulfilled. But, in case any variation, whether positive or negative is termed as excess or a short shipment respectively. Both short or excess quantity calls for penalty.
This KPI is calculated as SUM (volume of orders x weightage points) * 100 / (total volume of orders). Higher the KPI better the order fulfillment efficiency.

KPI = SUM (volume of orders x weightage points) / (total volume of orders)

[18] Claims and Discounts

A claim or discount can be defined as a penalty put on by the buyer on the manufacturer due no-committal shipment. This may be due to quality related problems, late delivery or order fulfillment. The penalty faced by the manufacturer is usually decided on value terms. The cumulative claim/discount amount upon company annual turnover expressed in percentage will give percentage of discounted goods over total shipment. Data collected for one year. This KPI measure percentage of non-discounted goods over total shipment, and is calculated as 100 - percentage of discounted goods over total shipment. The higher the KPI, the fewer the claims and discounts.

[19] Quality at Delivery

Quality performance is an overall index to measure the capability of a company to churn out goods right the first time in the right quantity, at the right time and right quality. Quality at the delivery point is checked and sometimes advised for 100% re-screening. Data should be collected over 3 months and averaged out. This KPI would be calculated as actual number of pieces shipped upon cumulative inspection plus re-screening quantity expressed as percentage. The higher the KPI, the better the quality at delivery efficiency.

For example, one shipment of 10000 pieces at final inspection (assumes as 100% inspection), may go for one re-screening of 2000 pieces, before finally shipping out 9800 pieces. The KPI would be 9800 / (10000 + 2000) x 100 = 81.66%

[20] Transit Time

It is the time taken to export the goods from the source country (exporting) i.e. from the time goods are moved out of factory (ex factory) to the warehouse at the destination country (importing country). The goods are transported either by air or by sea. The less the transit time, the better the supply chain efficiency. This KPI is calculated as (1X100)/(transit time in days) expressed in percentage. The higher the KPI, the better the transit time efficiency.
For example if the transit time for a sea shipment to Europe is 28 days, then this KPI is 3.57. It should however be noted that while comparing this KPI with other organizations, sea-shipment should not be compared against air-shipment.

Measuring efficiency of ABC Enterprise

The pilot study was undertaken by Sharad Diwan (Diwan 2006) as part of his masters thesis under the guidance of the researcher. The objective was to test the measurement framework in practical environment, measurability of each KPI, and data availability and confidentiality issue in measuring the KPI. The measurement framework was applied to three manufacturing organizations. In organisation ABC we were able to measure a total of 13 parameters. Only 7 and 6 parameters were measurable in two other organizations respectively. Poor and inconsistent record keeping, and confidentiality of information was the main reason behind not being able to measure all KPI’s.
In absence of any international benchmark about what should be the weight of different KPI in calculating overall supply chain performance of an organisation, an informal survey was undertaken among industry experts to weight different KPI on a scale of 1-10 based on their importance. Of total 15 responses average weight was calculated and listed against each KPI. Overall supply chain performance for organisation ABC (Weightage average for 12 KPI) was 69.77.
 
Supply Chain Efficiency Measurement

* Not considered for calculation

As explained earlier, each KPI was designed to be measured out of 100, but out of 13 parameters the value of one KPI, “production cost efficiency” in Make category came in at 509, which was ignored. On investigation it was found that while calculating the production cost efficiency  KPI, the VIM was only taken for the sewing department, thus the high KPI. The measurement calculation process needs to be further investigated as it is understood that the KPI is likely to hover around 200%. It is also important to note that any organisation may be strong in one area, but weak in other area. For example, organisation A was found to be strong in plan and deliver with average KPIs of 81 and 95 respectively. The weak area was source and make with average KPIs of 62 and 44 respectively.

Conclusion

Measuring Efficiency of a Supply Chain -I

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