10 Key Supply Chain KPIs You Should Be Measuring

10 Key Supply Chain KPIs You Should Be Measuring

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Key performance indicators (KPIs) are a set of quantitative metrics that can help you gauge your business’ performance over time. Specifically, they enable you to monitor how effectively your organization is achieving its target goals.

Omnichannel supply chains help businesses sell products through all possible sales channels. They require certain factors like order accuracy and on-time, damage-free delivery for smooth operations. Minor errors can cause major problems; for instance, the wrong package gets shipped to the wrong customer. As you can expect, this results in negative reviews and refund requests.

KPIs enable you to monitor the processes of your supply chain so that you’re able to identify the ones that need improvement. In this post, we’ll take a look at some of the most essential supply chain KPIs that’ll give you actionable insights into your business operations.

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What Are Supply Chain KPIs?

To define your supply chain KPIs, you must first set specific performance parameters required for tracking operations. These parameters reveal helpful insights like order accuracy, inventory turnover, inventory-to-sales ratio, and inventory velocity.

Essentially, these KPIs act as benchmarks that help you track the operational metrics of your business and reveal how effectively it’s meeting targets. It also enables you to make future projections based on the progress you’re making.

If you’re planning to (1) make business decisions related to expansion and business development or (2) improve your company’s order fulfillment and shipping operations or warehouse management, your KPIs will make it easier to track. Specifically, they’ll reveal any shortcomings allowing you to leverage your strengths to improve your supply chain operations.

10 Key Supply Chain KPIs You Should Be Measuring

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The two main goals of supply chain metrics are to increase productivity and improve customer satisfaction. So, to ensure you don’t get sidetracked, it’s essential to identify the supply chain metrics that are most important to your specific organization.

#1: Perfect Order

Easily the most important metric for measuring the effectiveness of a supply chain, the perfect order KPI is a compound of several important metrics that give you insight into several areas of your order fulfillment process. It can also help you track your storage and delivery operations, manage costs, and gauge customer satisfaction.

Some of the most important components of the perfect order KPI include:

  • On-time delivery. Determine the percentage of sales deliveries made on time.

  • In-full delivery. Track the percentage of sales deliveries made correctly, i.e. the right customer received the right package.

  • Damage-free delivery. Sometimes considered the same as in-full delivery, its purpose is to calculate the number of sales ordered that arrived in perfect condition.

  • Accurate documentation. Measure the percentage of sales deliveries that were delivered to customers with accurate documentation. These documents mostly include commercial invoices, labels, packing lists, and advanced shipment notifications (ASNs).

The Perfect Order KPI can help you determine customer satisfaction. For instance, if you have a low percentage of on-time or damage-free deliveries, it indicates that your customers aren’t getting their orders on time. These components will also reveal additional costs incurred by giving refunds and offering returns to customers.

The formula for measuring the perfect order KPI is:

((Total Number of Orders – Number of Error Orders) / Total Number of Orders) * 100

Where number of error orders refers to the key component (on-time, in-full, damage-free, or accurate documentation delivery), you’re measuring.

#2: Cash to Cash Cycle Time

Although cash to cash cycle time sounds like a strictly financial ratio, it also reveals important insights about your supply chain operations. It shows the number of days it takes between paying for raw materials and getting paid for the products you sell.

A low value of this supply chain KPI indicates an increase in leanness and profitability. It also shows that your storage and delivery services are in good health because your operating capital is tied up for a shorter duration.

This KPI can also enable you to determine the efficiency and effectiveness of your supply chain assets including shelves, workstations and trucks.

Here is how to calculate cash to cash cycle time:

Materials Payment Data – Customer Order Payment Date

Cash to cash cycle reveals the time it takes your business to pay your suppliers for materials to the time it receives payment from the customer. The shorter the time, the better.

#3: Customer Order Cycle Time

Customer order cycle time gives you important insights related to product service and supply chain responsiveness. It depicts the period between the moment a purchase order is received from the customer and the moment the order is successfully delivered to the customer.

If you see that the cash to cash cycle time is increasing, but the customer order cycle isn’t, it indicates issues with the former. Examining other vital metrics like invoicing times, account payables, and account receivables can help you find the cause.

Here is the formula for calculating the customer order cycle time:

Actual Delivery Date – Purchase Order Creation Date

Some businesses use a variation of the above formula to calculate the promised customer order cycle time:

Requested Delivery Date – Purchase Order Creation Date

#4: Fill Rate

Fill rate is one of the most crucial supply chain KPIs you can use to monitor the order fill and line fill rates. It’s represented as a percentage of packages or SKUs successfully shipped on the first attempt.

Fill rate KPIs help you understand the in-full performance of your supply chain. For instance:

  • Order fill. Measures the percentage of orders successfully completed on the first shipment.

  • Line fill. Measures the percentage of order lines successfully delivered on the first shipment.

  • Unit fill. Measures the percentage of items successfully delivered on the first shipment.

The formula for calculating the fill rate of a supply chain is:

((Total Number of Items – Number of Shipped Items) / Total Number of Items) * 100

Fill rate helps you gauge customer satisfaction and gives insights into the efficiency of your delivery service.

#5: Inventory Days of Supply

Inventory days of supply represent the number of days your inventory can sustain without restocking. This supply chain KPI helps you track the amount of inventory in your warehouse so you can replenish it just in time before demand gets high or in case of a stock-related catastrophe – while saving your reputation and investments.

You can monitor and analyze this information on a day-to-day basis and take action to refill stocks promptly.

Here’s how to calculate inventory days of supply:

Inventory on Hand / Average Daily Usage of Inventory

Reducing the inventory days of supply can help you minimize the risks of surplus and outdated inventory. If you see that this metric is decreasing, it means that less of your operating capital is tied to inventory (in other words, your business is getting financially leaner).

#6: Freight Bill Accuracy

Shipping your inventory items from factory to warehouse (or from warehouse to the customer) is integral to smooth logistics operations, and a slight error can harm your business’ reputation and cash flows.

Here’s the formula for calculating freight bill accuracy:

(Number of Correct Freight Bills / Total Freight Bills) * 100

Other than profitability, freight bill accuracy helps you meet customer expectations and identify negative trends in your billing operations.

#7: Days Sales Outstanding

This supply chain KPI reveals how fast you’re collecting payments from customers.

If you find that the days sales outstanding (DSO) of your business is low, it’s a sign of good financial health. It shows that it’s taking fewer days to generate revenue from your customers. On the flip side, a high DSO means that you are taking longer to collect account receivables, which can result in slowdown of cash flow and adversely affect your bottom line.

Here’s how days sales outstanding is measured:

(Account receivables / Sales) * Days in Period

A low DSO number translates to financial leanness and better efficiency of business operations.

#8: Inventory Turnover

Inventory turnover is another supply chain KPI that reveals insights about how many times your entire inventory is sold over a specific period. Inventory turnover can help you measure the efficiency of your order fulfillment, marketing and sales operations, and production processes.

Here’s the formula for calculating inventory turnover ratio:

Inventory Turnover Ratio = Cost of Goods Sold / {(Opening Stock – Closing Stock) / 2}

Inventory turnover ratio shows how efficiently you turn the working capital invested in your inventory into profit.

#9: Gross Margin Return on Investment

Gross margin returns on investment (GMROI) is an important KPI that reveals information about the profitability of a business entity. It shows the exact amount of money made from a specified amount of inventory investment.

You can identify slow-moving items in your inventory by tracking GMROI monthly and use this information to improve the planning, production, and warehouse operations of your business.

Here’s how GMROI is calculated:

GMROI = (Gross Profit) / [(Opening Stock – Closing Stock) / 2] * 100

Generally speaking, GMROI between 200 and 225 is considered a benchmark and shows good profitability.

#10: Inventory Velocity

Inventory velocity is a key supply chain KPI that reveals the percentage of inventory that’s estimated to finish during a given period.

This KPI provides useful insights about your warehousing operations and helps you optimize your inventory levels, meet customer demands effectively, and reduce risks of excess and outdated inventory.

Here’s how you calculate inventory velocity:

Inventory Velocity = Opening Stock / Next Period’s Sales Forecast

  • 60 to 70 percent is considered a good benchmark of inventory levels.

  • 75 to 80 percent is recommended for fast moving stock items.

  • Inventory levels above 80 percent or below 60 percent, are considered risky as it can lead to serious shortage or excess of stock.

You can categorize each SKU according to its inventory velocity and label it as fast-moving, slow-moving, or continuous-moving items by monthly sales, margin percentage, and the number of leftover items in your warehouse. This will also enable you to track which SKUs are best-sellers and which are poor performers.

Conclusion

Supply chain KPIs can help you gauge the financial health of your business. They can also reveal useful insights about your warehouse operations and enable you to make smart decisions, faster.