The importance of supply chain operations became clear long before the global pandemic and Russo-Ukrainian War. Organizations are now stepping up efforts to optimize their supply chain operations to meet the new challenges posed by the worsening global economy and the geopolitical situation. Investment in digital supply chain management solutions is projected to double by 2026 (See figure below).
Figure 1. Global supply chain management software market 2020 to 20261
However, measuring the performance of a supply chain is necessary before improving it. Supply chain leaders need to understand the current state of their supply chain before implementing any improvements. Leveraging key supply chain KPIs can help you understand your supply chain and what it needs better.
This article explores 5 key performance indicators (KPIs) that can help supply chain leaders measure their supply chain performance.
1. Perfect order rate
Perfect order rate is one of the most commonly used key performance indicators for assessing the overall supply chain performance. This supply chain KPI directly measures a supply chain’s ability to fulfill orders free of errors and incidents.
How it is measured
For a business to complete a perfect order, it must meet the following requirements:
- The order left the warehouse on time
- The order is received by the customer on time
- The order contains all the items in the right quantity and quality
- No returns are made
- There are no payment issues.
The simplest way to track your perfect order rate is to subtract the failed orders from the perfect orders. The reasons for the order failure can be easily traced, given the complete process is recorded and laid out through integrated digital tools with real-time data sharing.
This metric directly impacts customer satisfaction and, therefore, must be included in an effective supply chain performance measurement process. The KPIs can also be added to a supply chain metrics dashboard to help managers easily use its data.
- Sometimes, it is difficult to get customer feedback on a specific order, which is why some businesses don’t learn about a failed order until a complaint is made.
- Another challenge is the lack of data sharing among business partners in the vertical supply chain. This can be due to a lack of digital collaboration or privacy concerns and can lead to weak supply chain visibility and ineffectiveness of the KPI. Check out this article to learn more about how to improve supply chain collaboration.
2. Cash-to-cash time cycle
The cash-to-cash (C2C) time cycle is also a common and effective supply chain KPI that measures the time between the payment being made to the suppliers and being received from the customer. Reducing this time cycle is the aim of all supply chains since it indicates that the funds are spending less time in other hands.
How it is measured
3 main parameters to consider for this KPI:
- Days of inventory (DOI)
- Days of payables (DOP)
- Days of receivables (DOR)
Identifying the optimal C2C cycle time is challenging since it depends on the business dynamics. Therefore, businesses should continuously review supplier terms and their supply chain to identify opportunities to improve C2C cycle time.
3. Supply chain cycle time
In the post-pandemic world, where supply chain resilience is becoming increasingly important, this supply chain KPI is useful for measuring the ability of a supply chain to respond to volatility. This KPI shows how long it will take for a supply chain to fulfill an order if it runs out of stock. This means the total time for a supply chain to produce, pack and deliver the product.
The shorter this time, the more agile, flexible, and resilient the supply chain is.
Monitoring total supply chain cycle time can identify pain points in the supply chain, which create future disruptions and impact supply chain responsiveness.
How it is measured
In order to measure and analyze your supply chain cycle time, you need to be able to accurately track each step in your order fulfillment process. This includes tracking:
- When orders are received
- When they are processed and made ready for shipment
- On which date and time are the products shipped to customers
- When customers receive their orders
You can use digital solutions such as RFID (Radio-frequency identification) to track packages. By tracking each step in the logistics process, you can easily identify areas for improvement and improve supply chain cycle time overall.
The main challenge in using the supply chain cycle time KPI is collecting accurate and reliable data from every step of the order fulfillment process. This involves ensuring that all employees involved in receiving, processing, shipping, and delivering orders are accurately logging their activities or that you are using a digital supply chain visibility solution so that high-quality data can be gathered.
4. Inventory Turnover
Inventory turnover is also a crucial supply chain KPI which falls under logistics operations. Other terms for the inventory turnover KPI are inventory velocity and inventory-to-sales ratio. This metric measures how many times the entire inventory of a business is sold in a specific period. So, for instance, a shoe manufacturing factory produces a batch of 2000 shoes in one day. When all the shoes from that specific batch are sold, a point will be added to the inventory turnover dashboard, increasing the overall inventory velocity.
How it is measured
A higher number shows healthy sales and revenue, while a lower number shows weak sales. However, the inventory turnover rate depends on the nature of the business; for example, the rate of an FMCG store would be much higher than an automotive brand such as Porsche.
Comparing the inventory turnover rate with direct competitors can give insights into the supply chain’s overall performance and guide supply chain managers toward improvements. The formula to calculate inventory velocity/turnover/inventory-to-sales ratio:
The inventory turnover KPI can be a challenging metric for some supply chains, especially those that are highly complex and involve multiple stakeholders. It can be difficult to accurately track the date of purchase and sale for each item in order to calculate the correct figure.
Additionally, it is important to take into account factors such as seasonal fluctuations and changes in demand, as these can greatly impact the inventory turnover rate. For such a complex supply chain, it is important to use an integrated cloud-based digital solution.
5. Demand satisfaction rate
This is another essential supply chain KPI to add to the supply chain performance measurement package. Demand satisfaction rate or fill rate refers to the customer demand that was satisfied or filled by stock availability and without backorders or lost sales. This KPI represents the demand that can be satisfied if inventory management in the supply chain is improved.
How it is measured
To measure this KPI, you first need to track each customer order, including the order date and delivery date. You then need to calculate the number of orders that were met on time, as well as those that were delayed or not fulfilled at all. Then you can use this formula:
- The number of orders met on time ➗ The total number of orders received = Demand satisfaction rate
One way of improving this KPI is to improve supplier relationships across the vertical supply chain. However, this can be challenging, especially in an environment where businesses are increasingly relying on offshore suppliers. To learn more about how to improve supplier relations, check out this quick read.
Recommendations on implementing supply chain KPIs: Digital performance measurement
Apart from the KPIs mentioned in this article, there are many more KPIs that supply chain managers need to use in their performance measurement process and keeping track of all of them can be a challenge. We recommend using an all-inclusive supply chain management software that can help efficiently measure all your KPIs to accurately track the supply chain performance.
Check out our data-driven list of supply chain software to find the option that best suits your business needs.
- 3 Ways To Optimize Your Supply Chain
- Top 5 Supply Chain Trends
- 5 Steps To Improve Supply Chain Visibility
- Top 5 Technologies Improving Supply Chain Sustainability
- 3 Ways DX Can Strengthen Supply Chain and Logistics
- 7 Ways to Improve Your Supply Chain Sustainability
- Top 5 Ways Digital Twins Transforms Supply Chain
- 3 Ways to Improve Supply Chain with Automation
- 4 Ways to Optimize Logistics Operations
- 4 Ways To Optimize Procurement
If you need help finding a vendor or have any questions, feel free to contact us:
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