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Measuring Supply Chain Performance With 7 KPIs

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Measuring Supply Chain Performance

Supply chains are an essential part of every business. Even businesses that don’t deal with physical products have resources and supply chains.

We’ve all experienced the frustrations of unexpected delays in global and local supply chains. You ordered a new couch, only to find out you’re going to be waiting 9 months for it to be delivered. What you thought would take a few weeks turns into nearly a year.

Some supply chain delays are caused by outside circumstances that are out of everyone’s control. Other times, companies can optimize their supply chain and increase efficiency. They can take steps towards a more robust supply chain and avoid delays and setbacks.

Building a robust supply chain begins with understanding the state of your supply chain. This will help you find what’s working well, and where there’s room for improvement. 

This can be complex, so we’re going to share seven metrics, or key performance indicators (KPIs) that will help you measure supply chain performance.

7 Important KPIs of supply chain management

1. Cash to Cash Cycle (C2C)

Cash-to-cash cycle, also known as cash conversion, measures the time between a company paying suppliers and when receiving cash from customers in exchange for those supplies.

For example, if our machine shop buys aluminum bar stock from a supplier, the C2C cycle begins. Then, we machine the aluminum parts and ship them to our customers. The C2C cycle ends when our customer pays us for the parts.

Some studies have found the best companies tend to have a cash conversion cycle of 30-45 days, regardless of industry. With a shorter C2C cycle, the company has access to more working capital. 

This study of more than 22,000 publicly-traded companies showed a direct correlation between shorter C2C cycles and greater profitability in 75% of cases.

Here is the formula to calculate your cash-to-cash cycle:

Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) – Days Payable Outstanding (DPO) = Cash to Cash Cycle Time

2. Inventory levels

The next important supply chain metric is inventory levels. Inventory-carrying costs can increase the total costs significantly, so it’s essential to not have too much inventory sitting around. It’s also essential to have sufficient inventory to meet customer needs quickly. 

Keeping track of inventory levels helps find the balance of maintaining enough inventory while also reducing carrying costs when possible.

In a supply chain system, inventory can be divided into four categories.

  • Raw materials: unfinished goods that are used to create a product.
  • Work-in-progress: a semi-finished product that’s in-between raw material and a finished good.
  • Components: similar to works-in-progress. They’ve been worked on at one manufacturer, but are sent somewhere else to be assembled or worked on more before reaching the end consumer.
  • Finished goods: products that are ready for the end consumer to purchase and utilize.

3. Inventory turnover

Inventory turnover is the number of times your entire inventory is sold within a specific time period. A lower inventory turnover shows that a company is carrying excess inventory, which is costing them money. An inventory turnover rate that’s too high can also lead to goods going out of stock.

This supply chain KPI is typically measured in times per year. For example, a company buys 300 copper fittings and 40 steel housings on January 1st. By February, the 300 fittings were sold, and the 40 housings were sold by March 31st. If those numbers are the same all year, the company has an inventory turnover rate of 4. Even though the copper fittings sell every 2 months, the entire inventory is sold 4 times per year.

A higher number is usually a signal of good 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 inventory turnover rate at a grocery store will be much higher than a car dealership.

Comparing your inventory turnover rate with direct competitors can give valuable insights into the supply chain’s overall performance and help improve your supply chain.

4. Perfect order rate

Perfect order rate is a composite metric. Perfect orders from every stage are multiplied to give an overall performance indicator. 

A perfect order checks these 5 boxes:

  • The order left the warehouse on time
  • The order is received by the customer on time
  • The order contains the correct quantity and quality of items
  • There are no payment issues
  • No returns are made

Measuring perfect order rate can be slightly misleading. Even if four stages are at 99%, when multiplied together the entire process has a 96% error-free rate.

You calculate your perfect order rate by multiplying the percentages of each stage.

Left the warehouse on time: 100%
Received on time: 99%
Correct quantity and quality: 100%
No payment issues: 98%
No returns: 97%

1 x .99 x 1 x .98 x .97 = 94% Perfect Order Rate

The perfect order rate is a great benchmark for overall supply chain performance. Knowing this can help companies pinpoint and fix issues. The index can then be assessed over time to measure process improvement progress.

5. Supply chain cycle time

The supply chain cycle time measures how long it takes to complete a customer order when all inventory levels are zero when the order is placed. This metric gives you the longest possible lead times for every stage of the supply chain—it’s like a stress test for your supply chain.

Cycle time is also called the lead time. For supply chains, cycle time can be defined as the business processes of interest, supply chain process, and the order-to-delivery process. In the cycle time, there are two lead times.

  • Supply chain lead time
  • Order-to-delivery lead time

The supply chain lead time measures the time from the customer placing an order and the supplier or manufacturer having the order ready to ship. This doesn’t include the delivery time.

The order-to-delivery lead time is the time from when the order is placed by the customer to the delivery of order.

As supply chain reliability is becoming increasingly important, the cycle time measures a company’s ability to handle supply chain volatility. A shorter cycle time means your supply chain is more agile, flexible, and resilient to sudden changes.

Monitoring your total supply chain cycle time can identify points of weakness in your supply chain, and opportunities to improve and avoid disruptions.

6. Fill rate

Order fulfillment rate, or fill rate, is the percentage of orders that you can ship from your available stock without any lost sales, backorders, or stockouts. This measures your ability to meet customer demand, and the overall effectiveness of your supply chain operations.

Knowing your fill rate is important because it represents the sales you can recover or service better if you improve inventory management. One study found that improving the relationship between a supplier and a retailer resulted in an 80% improvement in fill rate.

7. Customer service

Supply chains always involve multiple businesses. There are companies handling raw materials, suppliers, manufacturers, distributors, customers, and consumers. Customer service is a big part of successful supply chain management. 

There are many factors that influence the level of customer service within the supply chain. Here are four metrics to gauge your performance.

  • Order fill rate: The order fill rate is the portion of customer demands that can be fulfilled from the stock available. For this portion of customer demands, there’s no need to measure the supplier lead time and the manufacturing lead time. The order fill rate could be with respect to a central warehouse or a field warehouse or stock at any level in the system.
  • Stockout rate: The amount of orders lost because of an out-of-stock item.
  • Backorder level: This measures the total number of orders waiting to be filled.
  • Probability of on-time delivery: The percentage of customer orders that are completed on-time.

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