Over the past few years, supply chain management has become increasingly important. Supply chain disruptions have created significant problems for organizations in nearly every industry. Post-pandemic, concerns about inflation, shortage of raw materials, geopolitical conflicts, cybercrime, and the potential for recession are all continuing to produce inconsistent supply chains.
Staying on top of supply chain concerns requires a focus on the key performance indicators (KPIs) to better anticipate problems and maximize results. Evaluating KPIs for supply chain management is crucial to your organization to streamline operations, improve productivity, meet customer demand, and optimize profitability.
What Are Supply Chain KPIs?
Supply chain KPIs are the performance indicators businesses use to assess and optimize their supply chain process. KPIs for supply chain management provide the data you need to measure effectiveness against target goals and find areas for improvement.
Tracking supply chain metrics over time allows you to see more quickly where trouble spots are or where performance is lagging so that you can make adjustments for improvement. Supply chain KPIs act as benchmarks to provide insight into your supply chain operation and make future projections.
7 Key Performance Indicators in Supply Chain Management
The KPIs you measure may vary depending on your organization and its goals. In most cases, however, the key supply chain metrics will focus on two specific areas: improving workflow and improving customer experience. This produces an optimal supply chain process and enables you to deliver — or exceed — customer expectations.
1. Perfect Order Rate
One of the most important things you can do to create satisfied customers is to deliver what they want on time: a perfect order. When you have less than a perfect order rate, it is an indication that something’s not working properly in your operation.
Perfect Order Rate Formula
(Number of Order − Number of Order Errors) ⁄ Total Number of Orders
A perfect order is generally counted when sales deliveries are made as on-time deliveries, in full, and damage-free. It also includes providing customers with proper documentation, such as invoices, packing lists, warranty information, and any other paperwork that should be supplied.
2. Days Sales Outstanding
When you make a sale, you want to get paid as quickly as possible and maintain your cash flow. Days sales outstanding (DSO) indicates how long it takes to get paid by your customers. A low DSO shows faster payment. When you see your DSO start to increase, indicating a longer period between delivery and revenue, it will have an impact on your cash flow.
Days Sales Outstanding Formula
(Accounts Receivables ⁄ Sales) × Days in Period
DSOs can provide important insight into whether your customers are paying you back on time and whether your outstanding accounts receivable are at risk. During a recessionary period, DSOs are often a leading indicator of slowdowns and can provide data points about your customers’ financial health.
3. Customer Order Cycle Time
Order cycle times measure the amount of time between order placement and shipment. It helps measure the efficiency of your order fulfillment process. Longer order cycle times can create unhappy customers and indicate problems in your warehouse or supply chain.
Customer Order Cycle Time Formulas
(Delivery Date – Order Date) ⁄ Total Orders Shipped
Automation software can help you manage more efficiently, anticipate problems quicker, and generate better outcomes for cycle times.
4. Fill Rate
The fill rate is the percentage of orders you can fill without running out of stock. Higher fill rates minimize order fulfillment time and prevent lost revenue from stockouts or backorders on products.
Fill Rate Formula
(Total Completed Orders ⁄ Total Orders)
You can measure the fill rate across your entire product line, product categories, SKUs, or suppliers. This can help uncover inefficiencies in your supply chain and inform better reorder and safety stock decisions.
5. Freight Bill Accuracy
KPIs for supply chain management should also include freight bill accuracy. When freight bills are inaccurate or have discrepancies, it can be a costly mistake. It can drive up operational costs and take a significant amount of time to uncover and resolve. Industry analysts say carrier invoices contain errors at a rate of 15% or higher. Some freight auditing companies say they reject as many as 25% of invoices due to mistakes.
Freight Bill Accuracy Formula
(Number of Correct Bills ⁄ Total Number of Bills)
Identifying the source of inaccurate freight bills and addressing root problems can help streamline operations, reduce labor costs, and improve efficiency.
6. Inventory Turnover
Inventory turnover shows how many times a company turned over its inventory with the cost of goods sold (COGS) during a particular period. This KPI helps companies make more informed pricing, purchasing, manufacturing, and marketing decisions. Benchmarking inventory turnover against competitors can reveal important data points.
Inventory Turnover Formula
Cost of Goods Sold ⁄ Average Value of Inventory
A low inventory turnover can be an indicator of carrying excess inventory in your warehouse, which ties up capital. Low turnover may also be a sign of poor sales. However, a high inventory turnover can also be problematic, indicating poor inventory management and increased potential for stockouts.
A cloud-based asset management tool using IoT sensors and asset tags can produce greater visibility into your supply chain and help manage inventory turnover more effectively.
7. Supply Chain Costs
One important KPI supply chain management goal is to reduce supply chain costs without sacrificing efficiency. The supply chain cost ratio measures the total cost to manage supplies, fulfill customer orders, and generate revenue.
Supply Chain Cost Formula
(COGS + Distribution Costs + Other Supply Chain Expenses) ⁄ Revenue
Lower percentages indicate better performance and equate to higher profit margins. As the cost of goods sold increases, margins decrease unless companies can find additional efficiencies within their distribution costs or other expenses.
Discover Innovative Solutions for Your Supply Chain
By tracking and benchmarking KPIs for supply chain management, you can improve operations and efficiency, improve cost control, and produce a better customer experience. The Surgere Interius™ SaaS Suite provides a holistic supply chain source of truth with real-time insights and 99.9% data accuracy.
Sugere can streamline supply chain operations with state-of-the-art solutions for:
- Packing specifications
- Asset management
- Production control
- Transportation and Distribution
Contact Surgere today to discuss your supply chain challenges.