Average Payment Period for Production Materials

Category: Supply Chain.

When a company wants to analyze the performance of its supply chain, there are several metrics that can be used in this respect. Additionally, there are various performance management methodologies that measure the results of the supply chain process. Using an OKR management software can help you build a strong foundation. The guiding factor of OKRs is that it helps you align and manage your goals and key objectives on a measurable standard. So that you can determine the organizational performance via a transparent and clear framework. Generally speaking, each individual supply chain performance metric outlines specific information. Essentially, depending on what you want to find out, you can use particular metrics, or, preferably, you might use a combination of metrics, to get a comprehensive overview of your situation.

Typically, we could say that a formula is useful when it helps you to make some improvements. At the same time, it is worth mentioning that there are different benchmarks for each individual industry. With that in mind, in today’s article, we will focus on the metric that measures the average payment period for production materials. Why does this matter? We’ll answer below.

Introducing the Average Payment Period for Production Materials

So, what exactly is this metric about? What does it aim at calculating? And why should you consider using it? Or, better said: is it necessary to consider this? Expressly, this metric calculates the average time elapsing between the date when you receive the raw materials needed for your business’ operation, and the date when you manage to pay for them.

Should the average payment period be short or long? What is better, profit-wise? According to experts, it is better for the average payment period for production materials to be longer.

This is better because it gives you access to capital, in the case of emergencies or unanticipated expenses that could arise. Therefore, you should aim at paying your suppliers within a reasonable amount of time. But, the longer this timeframe, the more efficient a company’s operation is.

How do you calculate this, though? The formula used for this metric is as follows:

(Material Payables/Total Cost of Materials)
*
Days in the Period

Other Guidelines

Moving on, we would like to emphasize that you should consider other metrics, as well. Of course, you should make a priority out of paying your suppliers over a more extensive timeframe, as this diminishes the stress linked with needing to pay right away. But there are other metrics, which, to some extent, are related to this specific formula.

For example, there is the inventory turnover that indicates the firm’s efficacy in regard to the entire supply chain process. It is crystal clear that the production materials and the days of supply are interlinked with the inventory. Without the necessary production materials and order measurement, we couldn’t discuss the inventory turnover, could we? Once again, by aiming to enhance the inventory turnover in your company, you would imminently manage to generate strong sales targets whilst ensuring an effective, agile process. Efficacy is fundamental when running a company – you should know the trends that are specific to your industry, as well, to draw some parallels.

On a final note, supply chain performance metrics measure your firm’s operations in specific detail. Irrespective of your firm’s long-term goals, you’ll need to rely on the support of an effective plan that will help you identify your company’s weaknesses and overcome them. This is the key to long-term success.

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