Essential Measurements for Supply Chain Performance: 6 Key Performance Indicators (KPIs)
Score Our EBOOK Now!Mastering your supply chain with these essential KPIs
In the realm of business and sports, it's crucial to quantify performance and make strategic improvements. Just as we analyze an athlete's stats, we can't simply eyeball our supply chain's performance; we need data and a solid performance management system like The Owl.
KPI's (key performance indicators) are the qualities we measure to assess a company's overall health. In sports and supply chains, they help us identify the triumphs and areas for improvement.
When selecting your supply chain KPIs, focus on the most important factors for your company, making sure the data is readily available to analyze. Remember, neglecting one part of your supply chain may impact others, so it's best to maintain the balance within the supply chain triangle: Cash, Cost, and Service.
Here are six KPIs highlighting each aspect of the supply chain triangle:
1. OTIF (Service)
On-Time & In-Full delivery is an indicator of supply chain efficiency. It tells us if raw materials/goods arrive on schedule and in the correct quantity. Broken down further, it can reveal specific missed deliveries and stock shortages.
2. Customer Lead Time (Service)
This measures the duration customers must wait for their orders after placing them. Faster lead times lead to higher customer satisfaction, as seen in companies like Amazon.
3. Total Supply Chain Cost
This KPI encompasses the costs associated with sourcing, producing, transporting, storing, and more. With it, you can determine if costs align with your budget, saving you time and resources from manual calculations.
4. Procurement Cost
Procurement also involves hidden costs, including transportation, negotiation, and duties. Understanding both the purchasing and hidden costs can help companies make smart purchasing decisions.
5. Inventory Turnover (Cash)
This KPI assesses the efficiency of inventory management and product sales. A high inventory turnover means the company restocks frequently due to efficient management or strong product demand.
6. Cash to Cash Cycle Time (Cash)
This KPI measures the time between purchasing inventory from a supplier and receiving payment for the finished product. A shorter cycle saves your company money by reducing expense periods.
By focusing on these six KPIs, you can create a well-rounded supply chain focused on the balance of service, cost, and cash. Neglecting one part may lead to trade-offs with the other elements, so it's essential to strive for the least amount of trade-offs possible by improving the most important KPIs for your supply chain's service, cost, and cash performance.
The Owl offers a powerful supply chain performance management software and support from supply chain experts who can help you use these KPIs to optimize your supply chain. Click here to watch a demo of The Owl's platform!
Data and permission to publish this content provided by Harkirat Ahluwalia. Originally written for our platform and published on July 21, 2021.
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When assessing service, cost, and cash performance in supply chains, the following six KPIs are crucial:
- Order Accuracy Rate:
- Formula: Accurate Orders ÷ Total Orders × 100
- Why It Matters: This KPI measures the precision of inventory picking, packing, and shipping. High accuracy ensures customer satisfaction and reduces returns[1].
- Inventory Turnover:
- Formula: Cost of Goods Sold ÷ Average Inventory
- Why It Matters: This metric assesses how efficiently inventory is sold and replaced. Higher turnover indicates better cash flow and reduced inventory costs[1].
- Gross Margin Return on Investment (GMROI):
- Formula: Gross Profit ÷ Average Inventory Cost
- Why It Matters: This KPI evaluates profitability relative to inventory investment. It helps in optimizing inventory levels for better financial performance[1].
- Lead Time:
- Definition: Time between placing an order and receiving it.
- Why It Matters: Shorter lead times ensure quicker restocking and fewer stockouts, enhancing service and cash flow[1].
- Backorder Rate:
- Formula: Backordered Items ÷ Total Ordered Items × 100
- Why It Matters: A lower backorder rate indicates better demand fulfillment, which is crucial for maintaining customer satisfaction and sales[1].
- Supplier On-Time Delivery Rate:
- Formula: Number of Orders Delivered On Time ÷ Total Orders × 100
- Why It Matters: This metric tracks suppliers' reliability in meeting delivery deadlines. It affects operational efficiency and customer satisfaction[3].
These KPIs provide a comprehensive view of supply chain performance by evaluating service reliability, cost efficiency, and cash flow management.
[1] Ariens-Kowa, J. (2011, October 24). The Ultimate Guide to Supply Chain Metrics. Inbound Logistics.[2] Cousins, R. (2019, July 28). How warehouses and supply chains will change in a post-pandemic world. TechTarget.[3] Matchette, D. (2019, January 8). Supply Chain KPIs You Should Be Tracking. Supply Chain Collaboration & Technology Expo.
Logistics is crucial in the balance of the supply chain triangle, with KPIs like OTIF (On-Time & In-Full) delivery and Customer Lead Time assessing its efficiency and service quality.
Transportation costs are vital components in the Total Supply Chain Cost KPI, which provides insights for budget management and resource allocation.
Procurement Cost KPI helps evaluate purchasing decisions by considering both the purchasing and hidden costs associated with supply chain operations.
Demand Planning plays a significant role in Inventory Turnover, as efficient management and strong product demand lead to frequent restocking and enhanced cash flow.
Distribution is connected with the Cash to Cash Cycle Time KPI, as optimizing this process can save your business money by reducing expense periods.
Inventory Management, finance, and business strategy are interconnected when managing the supply chain efficiently and achieving the least amount of trade-offs between service, cost, and cash performance.
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