Just running a supply chain is not enough. The primary goal is to run a successful supply chain management (SCM), but how can you know for certain that you are running a successful SCM? The answer lies in the Key performance index (KPI). Supply chain KPIs, especially when implemented correctly, will help you measure the success of your SCM.
Anyone can run a supply chain, but a successful enterprise requires more. You need more than just wits to achieve and measure success.
Introduction
A successful supply chain is the key to achieving sustainable growth and staying ahead of the competition. But with so many moving parts and variables, how can you ensure your supply chain performs at its best?
That’s where Key Performance Indicators (KPIs) come in. These essential metrics provide valuable insights into the efficiency and effectiveness of your supply chain operations, enabling you to identify areas for improvement and make data-driven decisions.
Essential Supply Chain KPIs
In this article, we review the vital KPIs for measuring the performance of your supply chain management.
#1. On-time Delivery
The end result of your supply chain is the delivery of the product to the end-user, also known as the consumer. However, a successful supply chain delivers these products on time.
This metric goes beyond just calculating the on-time delivery rate. It also factors in an in-full delivery rate because delivery is not complete until it is done in full.
Calculation:
Number of timely deliveries
_____________________________ X 100
Total number of deliveries
Close to 20% of customers will not patronize an organization which delivers late. Therefore maintaining a high delivery rate is very important to your overall success.
#2. Perfect Order Rate
The perfect order is a simple calculation, but it can be very complicated to track, especially when the supply chain is quite complex. This is because the perfect order rate comprises essential variables. Some of them are timely, full, accurate, and incident-free delivery.
The variables might change depending on your supply chain, but the principle is the same. It is the percentage of perfect delivery your supply chain makes to its consumers.
Calculation:
Number of perfect order deliveries
______________________________________ X 100
Total number of deliveries
#3. Inventory turnover
This metric measures how much of a supply chain’s product or inventory is sold within a given time frame. Typically a slow turnover rate or ratio will mean that there are unfavourable market conditions. A high inventory turnover will mean the opposite.
Using this metric, you can adjust and manipulate your supply chain as needed to ensure you get the best possible outcome.
Calculation:
This will vary depending on your supply chain model, but generally, this formula works.
(Amount of inventory made – Amount of inventory sold)
__________________________________________
Time frame of choice
#4. Customer order cycle time
This is also known as the lead time. It is one of the most important supply chain KPIs. Order cycle time is the amount of time between the customer’s orders and when the order arrives at the customer’s location.
You always want a shorter customer order cycle time. It ensures timely delivery and customer satisfaction. The metric also helps you measure your supply chain’s responsiveness.
Calculation:
(Date and time of actual delivery – Date and time of order creation)
To get the average, divide the above equation by the number of orders.
(Date and time of actual delivery – Date and time of order creation)
_______________________________________________________
Number of orders
#5. Order Fill Rate
This metric helps you calculate the efficiency of your supply chain when fulfilling product orders without resulting in backorder or stock out.
Using this metric, you will be able to ascertain whether or not your inventory formula works right. If it doesn’t, you must change or create a new model for your supply chain.
Calculation:
The calculation is quite simple.
Successfully delivered orders
_______________________
Total number of orders.
You can multiply this formula by 100 if you want a percentage.
#6. Cash-to-Cash Cycle Time
The cash-to-cash cycle time is the average amount of time required to turn resources into cash flows, beginning with the payment for inventory and ending with the collection of money for the sale of that inventory.
Days of sales outstanding (receivable days), days inventory outstanding (inventory days), and days payable due (payable days) are all factors used to calculate the cash-to-cash cycle time.
Calculation:
(Receivable days + Inventory days) – Payable days
For this KPI, the lower the number, the better your supply chain.
#7. Cost of Supply Chain
Another very important supply chain KPI. The cost of your supply chain can significantly impact the profitability of your business. The lower the supply chain cost as a percentage of your sales, the better your business will do.
Analyzing your supply chain cost will help you identify improvement areas, such as sourcing, inventory, and logistics. It will also help you analyze your ROI and track your profit.
Calculation:
(Total inventory carrying costs + Total logistics costs + Total procurement costs)
__________________________________________________________________
Total number of products sold
#8. Supply Chain Cycle Time
The overall time it takes for a product to move through the complete supply chain, from acquiring raw materials or components to delivering the final product to the end customer, is called supply chain cycle time.
It includes all supply chain operations and procedures, such as sourcing, manufacturing, transportation, warehousing, and distribution.
This KPI is crucial in determining how effectively your supply chain handles its supply chain from beginning to end.
Calculation:
(Date of order of raw materials – customer’s order receipt date)
Importance of Supply Chain KPIs
1. Performance Measurement: KPIs give measurable measurements that allow firms to assess the performance of their supply chain activities.
2. Process Visibility: Key performance indicators (KPIs) provide visibility into numerous areas of the supply chain, allowing organizations to track the performance of various processes and services.
3. Decision Making: Supply chain KPIs provide useful data for making educated decisions. They provide insight into the performance of suppliers, transportation providers, inventory levels, and other essential supply chain management issues.
4. Continuous Improvement: Organizations can find opportunities for continuous improvement by monitoring and analyzing supply chain KPIs.
5. Goal Alignment: Supply chain KPIs aid in aligning the goals of many departments and stakeholders within a business.
Obinabo Tochukwu Tabansi is a supply chain digital writer & ghostwriter helping professionals and business owners across Africa explore various strategies that work and learn from the success and failures of various supply chains across the globe. He also ghostwrites social content for logistics & supply chain businesses
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