A Complete Guide to Evaluating Supply Chain KPIs and Metrics

March 28, 2024 by
Amisha Nena
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Have you ever wondered how your online order reaches your doorstep on time, even when it comes from different parts of the world? 

So, what ensures that your orders find their way to you smoothly maintaining a seamless supply chain flow? 

Now that you are being tricked with this question, let’s unravel your curiosity and deep dive into the supply chain metrics and KPIs. In an era where the e-commerce ecosystem produces a symphony of global transactions, understanding the metrics that underpin supply chain efficiency is the key to staying in tune with the demands of the modern marketplace.

In this journey of supply chain and KPIs, we will understand everything about supply chain metrics. 

This article will take you to learn, 

👉What are Supply Chain Metrics? 

👉What is KPI and the Role of KPI in the Supply Chain? 

👉The Crucial Importance of Supply Chain Metrics

👉Exploring 10 Essential KPIs in Supply Chain Management

👉Step-by-Step Process of Implementing Supply Chain Metrics

👉Conclusion: Effectively Track and Measure Supply Chain Metrics and KPIs with Us

What are Supply Chain Metrics?

Supply chain metrics are measurable parameters that organizations use to assess the efficiency, effectiveness, and overall health of their supply chain processes. 

They are specific measurements used to evaluate and gauge various aspects of a company's supply chain performance metrics. 

These metrics help organizations track, analyze, and improve the efficiency and effectiveness of their processes in producing, transporting, and delivering goods or services. 

It's like a set of tools that helps businesses keep their finger on the pulse of their operations, ensuring everything runs smoothly from start to finish.

Key Elements of Supply Chain Management

  • Planning 
  • Sourcing
  • Manufacturing 
  • Logistics 
  • Returns

What is KPI and the Role of KPI in Supply Chain? 

KPI stands for Key Performance Indicators are specific metrics that hold the key to evaluating the success of an organization in achieving its strategic objectives.

It is a quantifiable metric that serves as a marker of performance. 

The Role of KPI in Supply Chain

Think of KPIs in the supply chain like scorecards for a sports team. In a supply chain, KPIs are like the team's goals or targets. They help the business understand if it's doing well or if there are areas that need improvement.

For example, if on-time delivery is crucial for a company, the percentage of deliveries made on time becomes a KPI. 

If the goal is to keep costs low, then a KPI might be the amount spent on transportation compared to the overall budget.

So, KPIs in the supply chain are like the game plan they guide the team or company to success by showing how well they're performing in important areas. 

It's a way to keep everyone focused on winning the game of efficient and effective supply chain management.

What are the Types of Supply Chain Metrics?

  • Operational Metrics
  • Financial Metrics 
  • Customer Service Metrics

You have gained insights about the supply chain, KPIs, and the role of KPIs in the supply chain. 

Let’s move on to the importance of Supply Chain Metrics. 

The Crucial Importance of Supply Chain Metrics

Understanding the significance of supply chain KPIs and metrics is pivotal for optimizing operations and ensuring sustainable success. 

Increases Visibility: Metrics enhance the overall visibility of your supply chain, allowing you to track inventory days of supply effectively.

Decreases Production Cost: Utilizing metrics helps identify inefficiencies, optimize your supply chain performance, and reduce total supply chain costs.

Inventory Accuracy: Accurate tracking of inventory, a vital metric in supply chain management, ensures precision in inventory days of supply and minimizes errors.

Automate Supply Chain Processes: Implementing metrics facilitates the automation of various supply chain processes, improving the efficiency of the entire supply chain.

Risk Management: Effective metrics play a crucial role in identifying and managing risks promptly, contributing to overall supply chain resilience.

Decision-Making Support: Leveraging metrics provides data-driven insights, supporting informed decision-making and helping you choose the right KPIs for your supply chain dashboard.

Performance Evaluation: Metrics act as essential performance indicators, allowing regular assessments against predefined goals, vital for optimizing your supply chain.

In the next topic, we will list out 10 essential KPIs in supply chain management. 

Exploring 10 Essential KPIs in Supply Chain Management

10 supply chain kpis

  1. Inventory Turnover Ratio 
  2. Service Rate
  3. On-Time and In-Full Deliveries
  4. Backorders
  5. Rate of Return 
  6. Cash to Cash Cycle Time 
  7. Supply Chain Cycle Time 
  8. Customer Order Cycle Time 
  9. Days Sales Outstanding
  10.  Warehousing Costs

Let’s get into the details of 10 supply chain metrics.

1. Inventory Turnover Ratio

This key metric tells us how often items on the store shelves are sold and replaced. A high ratio signals that products are in demand and flying off the shelves swiftly, contributing to a healthy supply chain. 

On the flip side, a low ratio might indicate items lingering on the shelves longer than desired, prompting businesses to reassess their inventory management strategy.

Formula: ITR = Cost of Goods Sold / Average Inventory

2. Service Rate

Comparable to a restaurant ensuring accurate orders, the service rate in supply chain management is about meeting customer demands promptly and accurately. 

A high service rate means customers are receiving what they need when they need it, fostering satisfaction and loyalty. 

Conversely, a low service rate could lead to customer dissatisfaction and potential business repercussions.

Formula: Service Rate = Product Orders Delivered onTime / Product Orders Received

3. On-Time and In-Full Deliveries(OTIF)​

This KPI is a pledge to customers that products will arrive on time, and nothing will be missing. 

On-time and In-Full Deliveries display reliability and efficiency in supply chain operations. 

Meeting this criterion ensures customer trust and builds a positive reputation in the competitive market.

Formula: OTIF = (on-time delivery percentage + in-full delivery percentage) / 2

4. Backorders

Backorders occur when demand surpasses available stock, necessitating a customer waiting period. 

Efficiently managing backorders is crucial for customer satisfaction, as it involves a delicate balance between demand forecasting and inventory replenishment. 

Striking this balance ensures a steady flow of products and minimizes customer wait times.

Formula: Backorders = Number of undeliverable orders / Total number of orders x 100

5. Rate of Return

The Rate of Return is a measure of customer satisfaction and product quality. 

A low rate indicates that customers are content with their purchases, while a high rate might signify issues with product expectations or quality control.

Monitoring and addressing the reasons behind returns contribute to enhanced product offerings and customer experiences.

Formula: Rate of Return = Total items returned / Total items shipped  

6. Cash to Cash Cycle Time 

Picture spending money on goods and swiftly turning that spending into earnings that's the essence of Cash to Cash Cycle Time. 

A shorter cycle time means a more agile and financially efficient supply chain, positively impacting overall business liquidity.

Formula: Cash-to-Cash Cycle Time = Receivable days + Inventory days – Payable days 

7. Supply Chain Cycle Time 

From ordering to delivery, the supply chain cycle time measures the speed of your supply chain. 

A shorter cycle time indicates an agile and responsive system, ensuring products reach their destination swiftly, reducing lead times, and meeting customer expectations.

Formula: Supply Chain Cycle Time = Shipment Date - Order Receipt Date

8. Customer Order Cycle Time

This KPI focuses on the speed of processing and delivering customer orders. 

A swift customer order cycle time translates to satisfied customers, as their purchases are processed and delivered efficiently, minimizing wait times and enhancing the overall customer experience. 

Formula: Customer Order Cycle Time = Actual Delivery Date - Purchase Order Creation Date

9. Days Sales Outstanding

Days sales outstanding is like a financial calendar, tracking how long it takes for customers to pay. 

A shorter time is favorable, indicating strong cash flow and efficient credit management. 

It ensures businesses have the necessary funds to sustain operations and invest in growth opportunities.

Formula: Days Sales Outstanding = (Accounts receivable / Credit Sales) x Days​

10. Warehousing Costs

Like managing your closet to keep it cost-effective, warehousing costs involve overseeing the expenses of storing goods. 

An efficiently organized warehouse minimizes costs and ensures that resources are allocated effectively, contributing to overall supply chain optimization and financial prudence.

Formula: Warehousing Costs = Total annual overheads / Total number of products stored

Step-by-Step Process of Implementing Top Supply Chain Metrics

The implementation process takes place in multiple steps that are explained below. 

Let’s know how to implement supply chain metrics

Step 1: Define Clear Objectives

Frame specific and measurable aims for your supply chain metrics implementation. 

Just as a skilled navigator sets a precise destination, establishing clear objectives provides a roadmap for improvement.

Step 2: Select Appropriate KPIs

Select the KPIs that align with your requirements. It’s like the right tool will give you what you are seeking. 

Each KPI has its unique identity and purpose in measuring and improving specific aspects of your supply chain. 

Step 3: Assemble a Cross-Functional Team

Form a team with diverse expertise across supply chain functions. 

This collaborative approach ensures a comprehensive understanding and effective implementation, resembling a well-coordinated project team.

Step 4: Start Data Collection

After assembling an expert team, the next step is to collect relevant data to evaluate current supply chain performance. 

This will mirror conducting research for a project, with data providing valuable insights into existing operations. 

Step 5: Leverage Technological Solutions

Tackle technology to streamline data collection and analysis. 

Implementing advanced tools is akin to employing efficient apps for academic tasks, facilitating a more effective and accurate measurement process.

Step 6: Pilot Implementation in a Limited Scope

Commence the implementation in a controlled environment, such as a specific supply chain segment. 

Starting small allows for a focused approach, analogous to addressing a manageable portion of coursework before expanding to larger projects.

Step 7: Test and Evaluate

Precisely test the selected metrics, evaluate their performance, and make necessary adjustments. 

Similar to refining a draft, this step ensures that metrics accurately reflect the intended measurements and goals.

Conclusion: Effectively Track and Measure Key Supply Chain Metrics and KPIs with Us!

In conclusion, understanding supply chain metrics and KPIs is essential for optimizing your operations. These metrics act as a guide, reflecting the performance of your supply chain from planning to returns. The 10 key KPIs, such as Inventory Turnover and On-Time Deliveries, serve as a scoreboard, providing insights to enhance efficiency. Implementing these metrics, using a supply chain dashboard, and embracing analytics is crucial for gaining visibility and reducing costs. As supply chain leaders, measuring and improving performance is a necessity in today's competitive landscape. 

Join us on the journey to enhance your supply chain efficiency start tracking the right metrics with us today!

Amisha Nena March 28, 2024
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