Supply Chain Efficiency Measurement 2006

Supply Chain Efficiency Measurement

(Version 2003.01 for apparel manufacturing organizations)

Prabir Jana

Associate Professor
Department of Fashion Technology

National Institute of Fashion Technology
New Delhi, India

Copyright Prabir Jana 1

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Prabir Jana
Associate Professor, National Institute of Fashion Technology, India
Research Student, The Nottingham Trent University, UK

Email: prabirjana@gmail.com, prabirjana@niftindia.com, prabirjana@rediffmail.com

Copyright statement

2005 All content Prabir Jana. All rights reserved.

This publication, nor any part of it, may be copied, reproduced, stored in a retrieval system,
or be transmitted in any form by any means electronic, mechanical, photocopying,
recording or otherwise without prior permission of Prabir Jana.

This document is the product of extensive research work (as a part of PhD thesis by Prabir
Jana and Post Graduate Technology students of NIFT batch 2003-2005). The efficiency
measurement method prescribed here may not be used by any individual or organization
for any commercial gain other than self-use. The efficiency measurement methods
explained in this report are currently being tested by various apparel manufacturing
organizations. Any individual wish to use the document for academic research or any
organization wish to measure the efficiency of own organization, may please contact the
author for free use. The efficiency measurement method prescribed in this document is
believed to be correct but cant be guaranteed. The author does not accept responsibility
for loss arising from decisions based on the document.


Introduction

What cant be measured cant be improved. Even though Supply Chain Management is the
most talked about topic today, currently no tool is available to measure any manufacturing
organizations supply chain efficiency. Unlike productivity and or quality measurement,
where the parameter can be measured objectively and expressed in unit or ratio, supply
chain measurement is currently more of a qualitative statement. The project will use a 20
KPI (key performance Indicators) supply chain efficiency measurement index adapted from
SCOR (Supply Chain Operation Reference) model, developed especially for the apparel
manufacturing organizations by the author and PG students of 2003-05 as a part of PhD
research work by Prabir Jana. Your organization will be one of the organizations for supply
chain efficiency measurement pilot study using the concept.

Measuring efficiency of a supply chain

Supply chain efficiency is measured in terms of efficiency shown by the chain with respect
to key functional parameters spanning four different operation domains namely source,
plan, make and deliver. There are about five primary key performance indicators (KPI) in
each operation domain to measure. Each KPI may consists of one or more secondary KPI.
Each KPI is expressed in percentage and derived in such a way that higher the KPI value,
better the efficiency of supply chain. Once all 20 KPI are measured, weighted average of
all KPI would indicate the overall supply chain efficiency of the organization. Weight of
each KPI will vary from company to company, In absence of clear priority of parameters
and thus weightage a company can calculate overall efficiency giving same weight to each
of the 20 KPI. While a 100 percent supply chain efficiency index would mean perfect
organization, there is a possibility of any organization having KPI value more than 100
percent.

While calculating KPI you will require various documents, records, challans to collect
required information. While good data house keeping will make the efficiency
measurement an enjoyable exercise, absence of data may be a frustrating and not enable
you to measure few KPI. The data collection is tedious but will be value for the effort.

This measurement process is currently at very nascent stage of testing for its usefulness
and accuracy and relevancy. Your invaluable suggestion will be most welcome.

This document does not elaborate the basic definition and principle of Supply Chain
and working in apparel manufacturing industry. The author assumes readers are
already well aware of basics the subject.


The twenty Key Performance Indicators in four operation domains are

Source

1) Inward Material Quality
2) Quantity and Timely Delivery
3) Procurement Unit Cost
4) Material Inventory Level
5) Vendor Development Capability

Plan

1) Adherence to Production Target
2) Sample Conversion Rate
3) Material Utilization
4) Cost Adherence
5) Planned T&A v/s Actual T&A

Make

1) Capacity Utilization
2) Production Cost Efficiency
3) Quality Capability
4) Change Over Time
5) Operator Training Effectiveness

Deliver

1) On Time Shipment
2) Order Fulfillment
3) Claims and Discounts
4) Quality at Delivery
5) Transit time


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:
1) Quality of material supplied is as per desired standards and 100% material is accepted.
KPI is 100
2) Quality of material supplied is not as per desired standards and 100% material is
rejected. KPI is 0
3) Quality of material supplied is not as per desired standards and material is accepted
fully or partially. KPI is calculated as under
On a scale of 100 points, the points can be allocated as below:
Case 1 : 100 points
Case 2 : 0 points
Case 3 : 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 as shown in example.

For example an order of 2000 labels to be delivered on 01/09/2004 and lead time 25 days.

Quantity
Received
Date Delay(Days) % Delay Qty %
(cumulative)
Points
500 01/09/2004 0 0% 25 30
500 03/09/2004 2 8% 50 30
500 07/09/2004 6 24% 75 30
500 16/09/2004 15 60% 100 0

The KPI for the order thus is (90/4) =22.5
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), officials 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.

For example suppose total procurement cost of fabric during Jan-Feb-March is Rs. 50000
and during that period total fabric received in warehouse is Rs. 25 lakhs. So the

procurement unit cost will be 0.02 percentage. Lower the figure better the supply chain
performance. So this KPI will be expressed as 100-0.02 = 98

[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.
Issued stock per day = (Monthly Closing stock- Monthly Opening Stock + Total
Received Stock)/ working days
Stock Held per day = Average daily Opening Stock of the month

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 Departments 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
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 minimum 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 sewing figure of one month for a company is like below

style Order
Qty
Cutting
target
Quantity
cut
%
completed
Points Cut x
points
M&S 001 2000 500 500 100 100 50000
Bhs 004 1750 400 500 112.5 100 50000
BG 003 1500 500 300 60 50 15000
BR-345 2100 300 100 33.33 30 3000
1400 118000

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

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

[8] Material Utilisation

Material is required at right time, right quantity and at right price. Material requirement
planning is done by merchandising or planning department and raise 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 actual fabric utilized (for
an order) upon total fabric received (for that order) expressed in percentage.

[9] Cost Adherence

An order is traditionally costed 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 actual cost incurred expressed in percentage. Data is
collected over minimum 3 representatives 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/incompetency 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 sewing department is easily available data for other
departments are 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.

For example the following data can easily be taken from any garment firms.

Number of machines 105
Number of operators 100
Number of helpers 20
Number of checkers 10
Number of supervisor 3
Duration of work shift 450 minutes
Product sewn Men's full sleeve dress shirt
SAM of shirt (sewing) 16.50 min
Average daily output (per shift) 2000 shirts

Minutes utilized (worked upon) = 16.50 x 2000 = 33000
Minutes available = (100+20+10) x 450 = 58500
Capacity utilization is 56%
Operator productivity = volume of output / direct labour input

Similarly capacity utilization for cutting and finishing may be calculated.

[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 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.


For example in a month the following styles were manufactured

style Profit Margin
(Rs.)
Qty SAM Value
Realised
M&S 001 255 2000 17.5 29142.8571
Bhs 004 325 1750 13.0 43750
BG 003 225 1500 21.5 15697.6744
BR-345 305 2100 18.0 35583.3333
total 7350 124173.865

VRM = (124173.865)/7350 = Rs. 16.89

Total production cost for that month is suppose Rs. 200000. Minutes worked in that month
is (25 days x 450 minutes) = 11250 minutes. So, value invested per minute (VIM) is
200000 / 11250 = Rs. 17.77

KPI = 16.89 x 100 / 17.77 = 95.03%

[13] Quality Capability

Quality is the important key performance indicator. It can be determined as by Defect per
Hundred unit (DHU) level. DHU level is the defect per hundred unit calculated at the final
stage of each department for e.g. In cutting department it can be calculated at the part
checking or auditing stage, after the cutting and bundling process. Similarly in sewing
department it can be calculated at final checking or audited stage, after the complete
sewing of garment from line. In 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. Higher the KPI better the quality capability of
the organization.

For example if the production of sewing department one day is 800, out of which 200
pieces is checked and DHU is 112, then 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 in the floor and total cumulative changeover time (all types for all machine is
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 training cell or effectiveness of operator
training. Operators are trained in training cell to take care of operator turnover in a
company. Training cell should train higher number of trainee as practically there is fallout
of trainees also. This parameter is measured as ratio of annual/monthly trainee
incumbent in production floor to annual/monthly operator turnover expressed in
percentage. Higher the KPI 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
customers 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 penalty. This
KPI is calculated as (volume/value of orders shipped x weightage points) * 100 / (total
volume/value of orders). Higher the KPI better the on-time shipment performance.

Example: Consider a company is required to ship 15 orders in July. The break up for these
shipments as per delivery status is:

Shipment status No. of orders
shipped
Volume of orders
shipped (in pcs)
Value of orders
shipped (in USD)
Weightage
points
Early by more
than 5 days
0 0 0 80
On-time 10 15700 47100 100
01-07days delay 3 12500 50000 60
08-15 days delay 2 8750 52500 30
More than 15
days delay
0 5670 19845 0

KPI (volume) for above example is 60.59, whereas KPI (value) is 54.79
This parameter is measured on a monthly (yearly) basis. KPI calculation can be done
either based on volume or value. Industry view is appreciated on this.

[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 (volume of orders x weightage points) * 100 / (total volume
of orders). Higher the KPI better the order fulfillment efficiency.

Lets us take the same example as in the previous parameter, a company is required to
ship 15 orders in the month of July.


Order Fulfillment Weightage
Points
Volume of orders
shipped (in pcs)
100% 100 20450
Excess or shortage by 1-10% 90 16500
Excess or shortage by more than 10% 0 5670

KPI = (volume of orders x weightage points) / (total volume of orders) = 82.82%

[18] Claims and Discounts

A claim or discount can be defined as a penalty put 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. Higher the KPI lesser 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 first time in the right quantity, at the right time and right quality. Quality at
delivery point is checked and sometimes advised for 100% re-screening. Data collected
over 3 months and averaged out. This KPI would be calculated as actual number of
pieces shipped upon cumulative re-screening quantity expressed as percentage.
Higher the KPI better the quality at delivery efficiency.

For example one shipment of 10000 pcs may go for one re-screening of full quantity at
manufacturers site and again another re-screen of 2000 pieces at platform, 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 source country (exporting) i.e. from the time
goods are moved out of factory (ex factory) to the warehouse at destination country
(importing country). The goods are transported either by air or by sea. Lesser the transit
time better the supply chain efficiency. This KPI is calculated as 1/(transit time in days)
expressed in percentage. Higher the KPI 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.

***** End of Document *****

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