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Chapter 4
The Measures of Success
Performance measurements (sometimes referred to as metrics) have been developed to
show the effects of better supply chain management. One measure is called the cash-to-
cash cycle time. This term refers to the time between paying for raw materials and
112 collecting cash from the customer. In one study, the cash-to-cash cycle time for
companies with efficient supply chain management processes was a month, whereas the
cycle averaged 100 days for those companies without effective supply chain management.
Another metric is total supply chain management costs. These costs include the cost
of buying and handling inventory, processing orders, and supporting a company’s
information systems. In one study, companies with efficient supply chain management
processes incurred costs equal to 5 percent of sales. By contrast, companies without
supply chain management incurred costs of up to 12 percent of sales.
Other metrics have been developed to measure what is happening between a company
and its suppliers. For example, Staples, the office-supply company, measures three facets
of the relationship. Initial fill rate is the percentage of an order that the supplier provided
in the first shipment. Another metric is initial order lead time, which is the time needed
for the supplier to fill the order. Finally, Staples measures on-time performance. This
measurement tracks how often the supplier met agreed-upon delivery dates.
Improvements in metrics such as these lead to improvements in overall supply chain
cost measurements.

Exercise 4.8
Assume a manufacturer of residential lawn and garden equipment is considering investing
in hardware and software that will improve linkages with suppliers. Management expects
to save 5 percent of sales by tightening up the supply chain in the first year, 3 percent
in the second year, and 1 percent in the third year. The company’s annual sales are
$1 billion. The company’s chief financial officer insists that the investment must pay for
itself in cost savings in three years. To meet this requirement, how much should the chief
information officer be allowed to spend on improving the supply chain? Explain your
answer.

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