In the first article we looked at the various performance measures we can use for Supply Support in Performance Based Contracts including grouping them into 3 main types; demand satisfaction performance measures, inventory holding performance measures and customer wait time performance measures. In the last article we looked at demand satisfaction performance measures in more detail. In this third and final article we’ll look at the remaining 2 groups of Supply Support performance measures (inventory holding performance measures and customer wait time performance measures) and give a simply diagram summarising which ones you should use and when.
Inventory Holding Performance Measures
Inventory holding performance measures need seller’s to maintain agreed stock levels at specified locations. While this limits the seller’s freedom in how they meet a buyer’s demand, it does also minimise the seller’s exposure to inaccurate and uncertain buyer demand profiles.
Given this, inventory holding performance measures are typically used where buyers wants confidence in their demands by specifying both the required stock levels and locations. One such example we have used is a performance measure called Minimum Asset Level (MAL), which is a measure of the number of stock items as a percentage of al stock items that are above the minimum stock level for each location. The inventory check can be done on a continuous basis (i.e. 24 hours a day / 7 days a week) or periodic basis (e.g. at 9am each day).
In certain circumstances using inventory holding performance measures is the best approach. For example, in some circumstances the holding of a minimum level of spares, especially those with low usage rates, is not economically feasible. However, what if these low use spares cause a critical failure and long delay? In asset management language, these low probability – high consequence items are called ‘insurance spares’. For example, many Air Forces hold extra, very expensive spare aircraft engines if they are needed due to random failures such as Foreign Object Damage (FOD) including the accidental injection of a bird into an engine during take-off or landing. While these events have a very low probability, when they occur they result in a very expensive asset being unavailable until a replacement engine is available. Accordingly, many Air Forces will specify extra ‘spare’ engines to be held with the maintenance organisations for these events. However, in the commercial aviation sector to solve this problem, an engine provider may combine (pool) spare engines for a number of airlines in the same region or airport to cut the costs to all airlines involved.
Successful use of inventory holding performance measures is dependent on accurately setting the stock levels and locations. Setting the levels too high will result in higher stock holding cost, but will meet all demands. Setting the levels too low will result in delays and increased costs based on the asset being unavailable for use.
Inventory holding performance measures are best used where failed delivery results in severe consequences where the buyer and seller have agreed stock levels and locations including the holding of low rate “insurance spares”.
Customer Wait Time Performance Measures
Customer wait time performance measures need seller’s to simply give an item within an agreed time period. Unlike the previous two type of supply support performance measures this approach makes the seller reactive to demands significantly reducing the seller’s exposure to inaccurate and uncertain buyer demand profiles. This focuses the seller on the timeliness between order and satisfaction, depending only on their processes for satisfying the demand which could be through procurement, manufacturing or repair. One customer wait time performance measure example is Turn Around Time (TAT) which is measure of time from placement to satisfaction of a demand (e.g. a 30 day TAT means that it takes 30 days from the buyer placing an order to the seller satisfying the demand). Successful use of customer wait time performance measures is dependent on seller’s processes for satisfying demands.
Customer wait time performance measures are typically used where there is a higher cost of holding additional (spare) items than the cost due to a delay in delivery of the item. Similarly, customer wait time performance measures are also used where there are low number of demands, again with low consequence due to a delay.
However, customer wait time performance measures should not be used where there are severe consequences for failed/ delayed delivery and where there are stable and high numbers of demands. In this case, demand satisfaction performance measures should be used.
These articles should guide the PBC practitioner to the best type of Supply Support performance measure for the specific PBC. A summary of these descriptions, including when it is best to use / not to use, is provided in the figure below. Given there is some overlap between the three types of Supply Support performance measures a performance test case should be developed and tested to make sure the ideal Supply Support performance measures are used.