The 80/20 rule for performance indicators

If you're like most manufacturing executives, you're being told that information technology today allows you to measure performance like never before. The question that remains is: How?

"Everybody measures something, but coming up with a balanced, comprehensive measurement program is very challenging," says Debra Hofman, service director for AMR Research's Benchmark Analytix Group.

Hofman says the greatest challenge is narrowing the focus from the thousands of metrics available to a manageable number that will help a company achieve strategic goals. "There are too many metrics," she says. "It's easy to get pulled in a lot of different directions."

In her report, The Hierarchy of Supply Chain Metrics: Diagnosing Your Supply Chain, Hofman offers a road map that delivers a balanced and structured approach to performance measurement. The hierarchy, a product of benchmarking with 40 companies across five industries, sets out a tiered system of key metrics that can improve supply chain effectiveness. The top tier uses demand forecast accuracy, perfect order fulfilment, and total supply chain cost to assess a supply chain's overall health, while the two subsequent tiers enable root-cause analysis of performance gaps and insight into corrective actions.

"The hierarchy provides structure and focus based on research," says Hofman. "Instead of starting with 50 or 100 metrics, start with four—the three in the top tier, and cash-to-cash cycle time—and use what you find there to direct your next steps."