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12 key supply chain metrics to measure and track performance

March 3, 2022

There are numerous key performance indicators (KPIs) your business can use to benchmark and measure supply chain performance.

While having access to such a wealth of data is excellent, it's easy for your desire to improve your supply chain operations to get paralysed by how much information you have. With that in mind, you need a plan for identifying the key metrics to measure that will help you improve your supply chain processes and outcomes. It's also worth remembering that different stakeholders within your business will have different views of what your most important metrics are.

Therefore, you must choose metrics that provide an overview of your entire supply chain while also engaging individuals and departments within your business.

What is a good performance metric?

When choosing KPIs to enhance your supply chain management (SCM) capabilities, they should all be:

  • Easy to understand - Everyone from your CEO to your procurement intern should be able to understand what you're measuring and what the data is saying.
  • Quantitative - If you cannot put a number or another measure on it, there's little value in measuring it.
  • Measuring what's important to you - What are the important metrics you can use to deliver improvements in your supply chain? You should try and avoid getting caught up in analysing data for the sake of it.
  • Directive towards best practice - The best KPIs make it obvious what action you need to take. However, you need to ensure that taking action to improve one area doesn't lead to adverse outcomes in another. For example, you might want to reduce lead times, but could this reduce error-free deliveries or product quality? Make sure there is interconnection across your target metrics so you can always view the impact your actions take.
  • Easy to collect - The most straightforward metrics are the best. And if you can view these in real-time on an automated dashboard or by using similar software, even better!

What am I measuring?

While there are several specific metrics you can benchmark and track, you'll generally be looking at one of three things:

  1. Time - Measuring how long something takes or the effectiveness of a process in a time context is easy to do. For example, you could measure lead times, percentage of on-time deliveries, or the average number of days for purchase orders to be processed by your accounts payable teams.
  2. Quality - Quality can be subjective. But once you have a benchmark, it's easy to measure. For example, you could measure things like your return rate, customer satisfaction level, or the number of times a customer complains about defective goods.
  3. Cost - Measuring things in terms of price is standard to most of us. However, financial metrics in a supply chain context go way beyond the cost of goods your procurement team are sourcing. You can measure things like cash flow, costs tied up in your inventory levels, the cost of goods sold versus excess inventory on hand, and much more.

Before choosing your metrics, set your objectives

What specific outcomes do you want to achieve from measuring your supply chain KPIs?

For example, you might say you want to:

  • Improve customer satisfaction levels
  • Improve on-time delivery rates
  • Enhance productivity across your supply chain
  • Increase gross profit by reducing defective orders

What you focus on is up to you. However, it will help you put together a handful of headline objectives first, so you can choose the relevant KPIs to measure to help you achieve these.

Remember, too, that you can choose objectives and metrics that focus on the effectiveness of your entire supply chain or a specific node.

12 KPIs to help you achieve better supply chain management outcomes

While this is by no means an exhaustive list of supply chain KPIs, we believe these are some of the most important metrics you can choose to focus on to see long-term, measurable improvements in your supply chain processes.

These KPIs are in no particular order of importance (apart from the first one!), so ensure you take the time to consider the right metrics to measure for your business and supply chain model.

1. Perfect order index

If you only measure one supply chain KPI, make it this one.

The perfect order index is a measure that encapsulates several metrics and gives you an overview of your overall supply chain performance. You can use this measure internally and within your SCM strategy for your suppliers.

What your perfect order index looks like may depend on your logistics processes, but generally, you should look to at least measure, as a percentage:

  • On-time shipping rate
  • On-time deliveries
  • Accurate, damage-free and in-full deliveries
  • Correct documentation included with deliveries

As well as measuring these individually, you should also use perfect order as a composite metric.

For example, say you achieve the following from 100 deliveries:

  • 100% on-time shipping and delivery rate
  • 95% accuracy rate (5 deliveries on time and with accurate documentation, but with inaccurate products or incomplete)
  • 95% accurate documentation rate (5 deliveries that were on-time and accurate, but without accurate documentation)

In this case, 10 out of your 100 total orders and deliveries weren't perfect, so your perfect order index would be 90%.

This metric is helpful because you can see your overall performance and know where you need to focus your efforts to achieve a higher success rate.

2. Supply chain cycle time

Supply chain cycle time is an excellent metric that can open your eyes to your supply chain's efficiency.

To measure this, you need to work out how long it would take to complete an order if your entire inventory of a product was out of stock when a customer made a purchase. Effectively, you're adding up the longest possible lead times for every step of your supply chain to understand how quickly you can meet customer demand.

Now, this may seem like something not worth measuring if your sales forecasts and inventory management practices are efficient. However, knowing how quickly you can replenish stockouts and arrange the first shipment of products is an excellent way to measure the efficiency and responsiveness of your suppliers. It'll also help you identify and mitigate potential procurement risks and have a plan for dealing with demand volatility.

3. Order fill rate

Your order fill rate is the volume of customer demand you can meet through your stock availability without losing sales or having to take backorders.

Knowing your fill rate is worthwhile as you can understand if and when products may sell out and then revise sales forecasts and orders accordingly without seeing the bullwhip effect. Potential solutions might be to increase your average inventory holding or move to a more agile supply chain model.

However, it may also be that you don't need to do anything more than ensure you have amazing relationships with your suppliers so they're willing to help out when you need to increase order quantities.

4. Inventory turnover

The inventory turnover metric tells you how many times you sell your entire inventory within a specific period.

As a simple example, let's say you have 100,000 total units in stock at the start of the year. If you were to sell 200,000 units this year, your inventory turnover would be two.

Why is this important?

Well, the lower the number, the more likely you have a problem. Now, the actual problem could be many things, including:

  • Lower than expected sales
  • Poor sales forecasting
  • Inaccurate ordering
  • An inefficient supply chain

Whatever the cause, low inventory turnover ultimately means you're holding onto more inventory than you ideally should be, tying up capital and affecting your cash flow.

5. Inventory velocity

Closely related to this inventory turnover is inventory velocity, which is more of a forward-looking KPI. Essentially, your inventory velocity is a projection of the percentage of your inventory holding you will sell over a specific period. If your projected inventory velocity is over 100%, you know you need to ensure you have more inventory on hand. In contrast, if it's lower than, say, 50%, you can free up cash flow by not placing replenishment orders for the products you expect to sell slowly, lowering your average inventory on hand.

6. Gross margin return on investment

Return on investment (ROI) is ultimately at the heart of every great business decision and process.

If your supply chain is not delivering a positive ROI, that will impact every area of your business, likely see your customer satisfaction tank, and potentially put your entire business at risk.

In this context, your gross margin return on investment (GMROI) measures how much profit you make, on average, for every dollar or whatever currency in which you predominantly trade, you spend on inventory investment.

Measure this KPI overall and on a range and product level to enjoy a significant insight into where you're achieving value in your supply chain and where you can realise improvements.

7. Warehousing costs

Measuring your warehousing costs is an excellent way to spot inefficiencies and potential warnings in your supply chain.

For example, if staffing costs in your warehouses go up, that can be a sign of increased customer demand but also may indicate a drop in productivity. Whatever the problem is, setting a benchmark for warehousing costs means you can investigate and take action whenever these change and avoid any long-term issues.

8. Supply chain costs

If you're measuring your GMROI, you'll already have most of the data you need to measure and analyse your supply chain costs.

However, in this context, you're looking at your entire supply chain and the costs associated with it. So, instead of thinking of costs purely in terms of what you buy, you're also measuring things like:

  • Systems costs
  • Internal staffing costs
  • Logistics costs
  • Ongoing risk assessment costs

As with warehousing costs, you should look to set benchmarks, and both identify opportunities to make cost savings while taking action when costs appear to be rising unexplainably.

9. Inventory days of supply

Inventory days of supply are probably one of the most straightforward supply chain metrics you'll work with, but it's also potentially one of the most effective.

As its name suggests, this metric tells you how many days' worth of inventory you have of a particular product were you not to replenish it. As a result, this metric helps identify uplifts and downturns in sales, as well as ensuring you'll be able to meet customer demand in light of any expected supply disruptions, such as natural disasters.

10. Customer order cycle time

Customer order cycle time ties in closely with some of the metrics you'll look at with your perfect order index while helping you to identify bottlenecks within your internal processes.

Overall, you'll measure the time it takes from a customer making an order to when they receive it. However, within that, you can look at:

  • Time taken to pick products after a customer makes the order
  • If picking time and accuracy drops during specific periods, then take remedial action
  • Time taken to deliver the product - tying back into your perfect order KPIs
  • The impact of larger orders on these metrics - for example, if you use your e-commerce platform to push add-on sales to grow average order value, but it takes longer to pick these orders and affects accuracy, you're improving one metric while damaging another.

As with the perfect order index, look at these metrics individually and in combination to understand your opportunities for improvement.

11. Cash-to-cash cycle time

Cash-to-cash cycle time, or C2C, is a vital metric for optimising cash flow while identifying if you're holding too much stock on hand.

With this metric, you're measuring the time between you paying for products from suppliers and taking payment for goods sold from your customers. You can use this metric alongside inventory days of supply and inventory velocity to optimise your supply chain and inventory holding levels.

The shorter your C2C cycle time, the better. You'll have vastly better cash flow and retain the flexibility to change order quantities in line with your sales forecasts while ensuring you always have adequate inventory to meet customer demand.

12. Freight cost per unit

Transportation costs in your supply chain can quickly become a "money pit" if you don't have control of your logistics processes.

Essentially, measuring your freight cost per unit allows you to identify inefficiencies around transportation in your supply chain. For example, if you have fixed transportation costs, you'll pay for a shipping container or truck regardless of whether it's 100% or 10% full. Naturally, you want to be receiving deliveries with 100% full containers to achieve maximum efficiency and optimal freight cost per unit.

Where this isn't happening, you can look at revising your shipping schedule to optimise your ROI from your logistics partners while still ensuring inventory is in the right place at the right time. Risk pooling techniques may also help you achieve this.

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