The supply chain forms the core of every business and determines its success to a great extent. For business success, the supply chain needs to be kept at maximum efficiency, running smoothly like a well-oiled machine. However, to keep the supply chain working at maximum efficiency, you need to keep tabs on supply chain performance and the effects of tweaks made to improve the supply chain.
This is achieved with key performance indicators (KPIs) and is essential to maintaining control of the supply chain. Constantly monitoring these KPIs will help ensure a smooth running of the supply chain, identify areas that need improvement, and ward off any potential disaster, helping the business achieve its goals. These KPIs can be financial, customer-based, process-based, etc., and give an insight into the achievements of the supply chain compared to set goals and competitors’ achievements.
KPI relies on data collection and storage, using the data to arrive at various numbers or ratios that help the business management make better and more informed decisions on how to improve the supply chain and achieve business growth. For example, KPI gives you an idea of how well your supply chain is performing and how to improve it for the reduced container shipping costs from China to the UAE.
Best KPIs for Effective Tracking of Supply Chain Performance
There are many supply chain KPIs that can be used to measure efficiency, ensure productivity, streamline operations, and enhance customer experience. Below are some of the best KPIs to monitor supply chain operations, formulas for tracking them, and how to improve them.
Perfect order rate
This is a measure of the orders delivered to the right customer at the right time, without errors, expressed in percentage. Errors include delayed delivery, damaged goods, incomplete documentation, etc. This KPI covers some other smaller KPIs that address more specific areas of your order rate.
1. On-time delivery rate
This is the percentage of orders delivered on or before the desired delivery date. It gives you an idea of how well you’re meeting up with customer demands, keeping them happy and satisfied, and is essential to maintaining a successful business. You can improve this KPI by taking note of reasons for delayed deliveries and improving on them, and changing last-mile carriers and logistics providers if necessary. The formula for this KPI is (Number of on-time orders/Number of total deliveries) x 100
2. Damage-free delivery
This informs you of the rate of damaged deliveries you’re making. You can improve this KPI by reviewing your packing process, reassessing your shipping partner, using the correct box size, using protection for packing products, etc. The formula is [(total number of orders – number of damaged orders)/ total number of orders] x 100
3. Order fill rate
This is a percentage of orders completed in the first shipment shipping without having to use slit shipping. This KPI is an important measure of the efficiency of your supply chain operations. A low order fill rate translates to a high customer dissatisfaction rate. Thus its importance. You can improve this KPI by automating order management, and fulfillment processes and optimizing inventory management. The formula is (1 – [(Total items ordered – Total items shipped) / Total items ordered]) x 100.
5. Freight Bill Accuracy
This is used to measure the correctness of the information contained in your shipping bills. Such information includes pricing, items, amount, and weights. A low value for this negatively impacts the cash flow and the customer experience. Automating the invoicing and billing process or contracting out freight management to 3PL companies can improve this KPI. The formula for this KPI is (Number of correct freight bills/total freight bills) x 100.
Inventory sales ratio (ISR)
This is a ratio of the average value of your inventory to the net sales made during the same period. This KPI and other related KPIs such as inventory turnover ratio (ratio of COGS to average inventory value) and days inventory outstanding (average number of days inventory is held before selling it) give you an idea of the efficiency of your inventory management.
The formula for days inventory outstanding is given as (value of inventory/COGS) X 365, while the inventory turnover ratio is COGS/average inventory value.
These values can be improved by better order management for a faster order life cycle and more accurate demand forecasting, enabling investment in inventory that sells faster.
Supply chain costs
This is a measure of the cost of running your supply chain operations. It consists of supply chain costs as a percentage of sales and supply chain cost per unit sold. The former is the total cost of running the supply chain compared to the overall monetary gains made from sales, while the latter is the average supply chain cost of selling a unit of a particular product (within a given time frame)
These values are best kept low and can be reduced if high by identifying the various inefficiencies in supply chain operations and eradicating them. Also, automating warehouse tasks, strategic distribution of inventory, and outsourcing supply chain operations to a 3pl company can reduce the values for supply chain costs.
The formula for this KPI is the Supply chain cost of a product/Number of units sold of the same product.
Cash to cash cycle time
This is the number of days between when you pay for raw materials and when you get paid for selling the goods made from the same raw materials. This KPI can be used to measure profitability, alongside storage and delivery services. A low value signifies a lean supply chain and business profitability as the operating capital is tied up for a shorter period. This KPI also gives you an idea of the effectiveness and efficiency of your supply chains assets such as workstations and trucks.
This KPI can be improved by minimizing the chances of your inventory becoming dead stock by ensuring better inventory forecasting, enabling you to identify and stock up faster selling inventories.
The formula of this KPI is given as Inventory outstanding days + Sales outstanding days – Payables outstanding days.
Gross Margin Return on Investment (GMROI)
This is a measure of how much money you made from sales of your inventory investments. This KPI also provides information on business profitability and best-selling products, enabling you to optimize inventory and procurement. GMROI can be improved by reducing inventory carrying costs, improving forecast accuracy, or adjusting pricing to increase profits.
The formula for this KPI is (Gross profit / [(Opening inventory – Closing inventory)] x 2] x 100.
Several other KPIs can be used to measure supply chain performance such as customer order cycle time, average delivery time, carrying cost of inventory, purchase order tracking, Days sales of inventory (DSI), etc.
For more effective KPI tracking and improvement, various supply chain management software can be used to provide real-time visibility of supply chain metrics for KPI tracking. This gives you the information you need to make better business decisions at a glance, and better equips you for business success.