As the final piece in our coverage of the 2016 ASQ Global State of Quality 2 Research — Discoveries 2016 report, let’s at the Spotlight Report: KPIs Key to Successful Supply Chain.
Key performance indicators (KPIs) describe specific metrics critical to determining how well an organization is performing. When a supply chain is involved, the complexities around measuring performance become apparent. Establishing meaningful KPIs is essential to driving operational excellence throughout the supply chain. According to the survey, 50 percent of respondents indicated that supply chain disruptions are the most concerning risk within their organization. When asked about training, 30 percent of respondents train Tier 1 suppliers on their quality management system, and 64 percent don’t train any of their suppliers at all.
As part of their research, ASQ and APQC called on supply chain experts to provide insight into the role and importance of establishing KPIs that effectively measure and predict supply chain performance.
Prem Vrat, PhD, pro-chancellor and professor of eminence and chief mentor at The Northcap University commented that metrics are important in the supply chain to evaluate the efficiencies and effectiveness of the process.
“(KPIs) will also identify the weak links in the supply chain so that action can be initiated to enhance performance of these weak links because the chain is affected by its weakest link,” Vrat said.
Clovis Bergamo Filho, president of Six Sigma Brasil, shared a similar perspective, adding: “If you don’t have the robust process and measures in place, it is not possible to increase the efficiencies.”
The report then delves into two KPI categories: process efficiency and cost effectiveness, and evaluates these measures to monitor where supply chains can control and improve quality performance.
Process Efficiency KPIs
Process Efficiency KPIs help measure the performance of any supply chain organization. This indicator allows organizations to measure their efficiency performance internally and externally.
Finished-Product, First-Pass Quality Yield for Primary Products measures how many units in the first pass through are completed with no rework.
First-pass yield helps capture and identify high-waste and low-efficiency areas for process improvement and additional monitoring.
Without this measure, an organization risks high levels of process inefficiency and waste.
Percentage of Defective Parts Per Million measures the amount of defective parts out of the total parts produced. This KPI focuses on the quality of the process and output before the product is shipped. In most supply chains, defective parts per million should be tracked on some form of control chart with an upper and lower limit. This sets the expectation of how well the supply chain should operate and places a goal marker for performance.
The supply chain group needs to ensure they source the right parts to decrease the overall number of defective parts. Additionally, the supply chain team needs to understand how many defective parts were a result of the assembly of defective parts or bad materials versus incorrect usage. The sorting process continues from there to understand whether a vendor of a part continues to have a defective part over time or if there a different issue at hand. Using this analysis, the organization has to decide whether to start looking at a more expensive vendor to justify a lower defective parts per million.
Warranty Costs as a Percentage of Sales compares the cost spent on repairs and replacement of distributed units to sales. This metric focuses on the amount of units that are defective after distribution to the customer. This can be used to track the effectiveness of the quality control group and the quality of product being produced.
It is the responsibility of the supply chain team to verify that the vendor or partner can meet the requirements of the component, and to the business. The goal is to minimize the costs of warranty support by procuring parts that are manufactured, shipped, and transported correctly to avoid damage.
According to the report data, 26 percent of respondents have reported issues with the overall cost of quality, including recalls, counterfeit, product defects, food safety, and supply shortage. Furthermore, 46 percent reported product defects as a quality-related issue.
Cost Effectiveness KPIs
Cost Effectiveness KPIs allow organizations to better manage and measure their cost effectiveness performance internally and externally.
The Scrap and Rework Costs as a Percentage of Sales indicator measures quality and waste in the supply chain process. This KPI is tied inherently to other process efficiency indicators, such as defective parts per million.
When defining this KPI, an organization must have scoped the process properly—as well as identified any undocumented processes completed by individuals. Scrap and rework costs can be reduced by systematically correcting a problem when an error is produced.
Almost 55 percent of survey respondents to date use waste reduction as a way to drive profitability.
Total Cost of Quality Per $100,000 in Revenue. The cost of quality is an important KPI to ensure cost effectiveness, and has two components: the cost of good quality and the cost of poor quality. Specifically, companies must pay attention to ensure good quality is consistent through quality inspection activities, prevention mechanisms, and other quality control vehicles. Companies must also pay for the cost of poor quality when a defect exists or the output does not meet requirements.
The real question is “What is the cost of poor quality? Which then leads to “How much am I spending versus how much am I avoiding?” “How do higher-quality supply chain practices drive a higher profit margin for the business?”
Advice From the Experts
The same group of supply chain experts shared their recommendations on how to either begin or improve their use of effective KPIs within their supply chain management.
“Organizations should identify the right KPIs relevant to the nature of their business and the dynamics of external business environment,” Vrat said. “This can be done either by benchmarking with the role models in their class (or) adapting to the specifics of the given situation.”
However, identifying effective metrics and fixing poorly performing objectives is only part of implementing KPIs in supply chain.
“Your KPIs need to be in line with the goals of your customers,” Brad Feuling, CEO of Kong and Allan Consulting said.
“You have to ask yourself, ‘What are my customer demands?’ A lot of companies ask that, but they don’t always act on it. But it’s important to correlate your metrics to those of your customers.”