More than ever before, business leaders recognize that top-performing organizations are driven by data. Management gurus have long been advocates of measuring, monitoring, and reporting on the numbers that matter most.
In the domain of supply chain management, a body of best practices has emerged that enables this kind of analysis to assess the performance of internal processes, suppliers, and service providers.
Here are the top 10 supply chain management KPIs that can help you run a more effective, efficient, and prosperous organization.
1. Cash to Cash Cycle Time
The cash to cash cycle time represents the average length of time required to convert resources into cash flows, starting from the moment you pay for inventory to the time you collect money for the sale of that inventory. You measure it using three common financial metrics, namely, days of inventory (DOI), days of payables (DOP), and days sales outstanding (DSO). Add DOI and DOP, then subtract DSO to arrive at cash to cash cycle time.
The smaller that number is, the better. Some companies have even managed to achieve a negative cash to cash cycle time. Apple famously reached an average of around negative 70 days over a four-year period, meaning that they consistently collected the funds for the goods they sold over two months before they ever paid for those goods.
Although this may seem more like a financial metric, the cash to cash cycle time says a great deal about the efficiency of your supply chain management practices.
2. Perfect Order Rate
This metric is quite simple to understand, although it can be a bit difficult to track on a routine basis simply because it incorporates a handful of variables related to processing and delivering orders to your customers. Briefly stated, the perfect order rate represents the percentage of orders that are delivered in full, on time, without incident, and with documentation that is accurate and complete. Many organizations look to this as the single most important supply chain key performance indicator (KPI) because it directly impacts customer satisfaction.
3. Fill Rate
Another important metric that impacts customer satisfaction is the fill rate. This represents the percentage of orders that are successfully completed with the first shipment. In other words, it is the percentage of orders that do not require a second, third, or fourth shipment, and so on.
In fact, many supply chain managers break this metric down into several additional metrics, namely the Line Fill Rate (number of sales order lines fulfilled in the first shipment), and the Unit Fill Rate (the quantity of each order line that is fulfilled, relative to the total quantity ordered.) The Order Fill Rate and Line Item Fill Rate metrics call for a binary “yes or no” indication, followed by a quick determination of the percentage of “yes” answers (that is, what percentage were completely filled on the first order). The Unit Fill Rate percentage is expressed as the quantity fulfilled as a percentage of total quantity ordered.
4. Customer Order Cycle Time
The customer order cycle time refers to the average amount of time (in days) that lapses between the date the customer places an order and the actual delivery date. If the cash to cash cycle is increasing but customer order cycle time is decreasing or staying the same, then there may be issues with the management of payables, receivables, or inventory.
5. Inventory Days of Supply
Historically, managers have shown a strong preference for maintaining minimal inventory levels. This reflects a tendency toward lean management, toward the most effective use of capital resources. If your money is tied up in inventory, sitting on the shelf in the warehouse, then it cannot be put to use elsewhere. Over the past 18 months, there has been a shift in thinking, due in large part to supply chain disruptions that came about as a result of the coronavirus pandemic.
Nevertheless, a low value for this metric is a strong indicator that you are running a lean operation. To calculate inventory days of supply, start with inventory on hand and divide by your average daily usage of inventory. As noted, there may be some legitimate business reasons for maintaining higher levels of inventory, especially if further supply chain disruption is to be expected. However, maintaining a low number for this KPI is generally a desirable goal.
6. Inventory Turnover
Inventory turnover is closely related to inventory days of supply, insofar as both metrics address the question of whether the company is maintaining more inventory than it needs. To calculate this KPI, start with the cost of goods sold for a specified period (e.g. for a month, quarter, or year.) Then divide by your average inventory level over the same period (which can be calculated by adding your beginning inventory to your ending inventory and dividing the result by two.) In this case, a high value generally means that you’re managing inventory effectively and efficiently.
7. Reasons for Return
Let’s face it: customer returns wreak havoc on your supply chain practices. They cost your organization valuable time and money, and they are usually correlated with a negative customer experience. Simply put, reasons for return refers to a metric that describes the factors that result in the return of product from customers. To track reasons for return, simply break down your customer returns into common categories, such as “defective item,” “damaged product,” “product no longer needed,” and so on.
An unusually high value in one or another category is indicative of a problem. For example, if the percentage of returns prompted by “product no longer needed” spikes, then it is likely you’ll see a corresponding drop in on-time deliveries. If a large number of returns came about due to a defective product, then you may have some serious quality issues.
8. On-Time Delivery
In a fast-moving world where virtually every business is struggling to meet customer demand amid supply-chain uncertainty, rapid delivery times are more important than ever. For both commercial customers and consumers, the ability to deliver products promptly is an increasingly important factor in purchasing decisions. If you can’t deliver what the customer needs when they need it, they’ll go somewhere else.
On-time delivery is generally measured as a percentage of orders delivered on or before the date by which they were promised. This has the benefit of being relatively simple; either you delivered the order on time, or you did not. Your on-time delivery percentage is a simple division calculation between the number of on-time orders and the total number of orders promised to customers.
9. On-Time Shipment
This one is very similar to the on-time delivery metric, with one small difference. On-time shipment measures (as the name would suggest) the percentage of orders that were shipped on time. Why the difference? Because variability between on-time deliveries and on-time shipments likely points to a problem with transportation and logistics. This might not be all that meaningful for companies that operate within a relatively localized geography. In an increasingly globalized economy, however, transportation and logistics are more important than ever.
10. Supply Chain Costs as a Percentage of Sales
There are a number of factors that can drive up the cost related to managing your supply chain. It’s not uncommon, for example, for manufacturers to expedite shipments of incoming raw materials to ensure that they can deliver a customer order on time. When you need something fast, it generally costs more. If suppliers know that you are on a short deadline, they’ll be in a position to demand higher prices for those incoming goods. Even if prices remain the same, there are usually additional costs involved with getting products shipped to you faster. While some of those costs will be incorporated into your cost of goods sold, others will simply show up as an expense item. In either case, there is a drain on profitability.
Supply chain costs as a percentage of sales simply tracks the total amount of money you spend on supply chain costs as a percentage of your total sales for the same period.
Bringing It All Together: Creating an Effective Supply Chain Dashboard
Although organizations may have different preferences as to the KPIs that are most meaningful to them, there is one common need that all of them share: Every organization that receives and stores inventory or raw materials and subsequently ships product out to their customers needs to manage their supply chain efficiently. Business leaders should begin by identifying the KPIs that will best reflect that performance based on their unique needs.
With that information in hand, every organization should consider implementing executive dashboards that pull together supply chain metrics and deliver that information in real time to the decision-makers who need it. At insightsoftware, we provide world-class tools for reporting, planning and budgeting, and more. Our products integrate with over 140 different enterprise resource planning (ERP) packages, making it possible to see exactly what was happening in the business at any given moment in time, without delay. At a time when agility and resilience are top-of-mind for most business executives, that provides meaningful business value. Download our complementary supply chain KPI dashboard today.’
