Fundamentals of Managing an Outsourced (CM) Value Stream

1.) Production Plan – provided from the company to the CM which may or may not match the sales forecast (via the Sales & Operating planning process, a decision might be made to reduce production based on the amount of finished goods inventory.)  The production plan could be compared with actual (output from CM).  If actual quantities are short of the plan, then causes and countermeasures can be determined to bring the value stream up to the desired capacity.

2a.) Perfect Order Fulfillment – indeed, it is important to measure that customer orders are being  fulfilled; however, this could include the quality of order fulfillment.  Perfect order fulfillment represents the customers perspective…that we delivered the correct product, to the correct place, at the correct time, in the correct condition and packaging, in the correct quantity, with the correct documentation.  The goal is 100% perfect orders.

2b.) Backlog – this terminology could be reserved for orders that cannot be fulfilled or parts of an order that are unavailable when needed.  (Sometimes backlog is presented as pending orders, which can be confusing.)  Of course, backlog should be minimized as we don’t want to keep the customer waiting….an obvious KPI:  is the customer waiting for something beyond the expected date?

3.) Company Operations Resource Loading & Attrition – it may (or may not) take an army of company resources to manage CM value streams.  Nonetheless, resource loading is a valid measure of operational efficiency.  In addition to production planning & execution, production support resources include quality, manufacturing and test engineers.  Ultimately, we’d expect to see fewer resources required over time as the company operational and CM value stream becomes more efficient.  

4.) CM Value Stream Efficiency – KPIs provided by the CM such as measures of quality, lead time and WIP.  (Note that a company objective is supply chain flexibility, therefore long lead times and significant excess inventory and/or WIP is a potential liability if there is a sudden change in demand.) 

5a.) Finished Goods Inventory (FGI) – perhaps one of the most important KPIs since capital is being tied-up in unsold finished product.  Is the FGI trend increasing or decreasing?  How many months of forecasted demand is represented by the FGI?  How long has unsold product been in the warehouse?

5b.) Inventory Turnover Ratio – measures how efficiently a company uses its inventory by dividing the cost of goods sold by the average inventory value during a set period.   Is the inventory turnover ratio increasing or decreasing and which product lines are drivers?  A low inventory turnover ratio is usually a sign of excess inventory.