Every company needs a strong supply chain to achieve success. In a dynamic ecosystem, every supply chain adapts to environmental changes facilitating goods distribution from suppliers to clients. This is the major reason any best logistics company accurately monitors and calculates KPIs (key performance indicators). Let us discuss the essential supply chain KPIs necessary to analyze a business’ development in detail here.
A Brief on Key Performance Indicators (KPIs)
Key performance indicators are quantitative metrics used to gauge the performance of a business over time. They allow you to understand how efficiently your firm is moving towards its goals. KPIs also let you monitor the supply chain processes so that you will be able to identify the areas that require improvement.
When you are measuring the cost and effectiveness of the supply chain, you must calculate the KPIs to gain a better insight into every supply chain component and its cross-functional activities. The crucial areas where KPIs must be monitored are:
- Inventory management
- Order processing
- Supplier management
- Procurement management
Using KPIs to evaluate performance ensures assessing various business activities by comparing them with static benchmarks. In simple terms, you will be able to respond immediately when something is going in the wrong direction, or you experience fluctuations.
Five Essential Supply Chain KPIs to Be Calculated in Every Business
The five primary supply chain KPIs that every logistics service provider should calculate with precision include:
The most crucial KPI statistic for assessing the efficiency of a supply chain is ideal order. It combines key metrics that offer information about several areas in a supply chain process. It is essential for monitoring:
- Delivery and storage options
- Handling costs
- Customer satisfaction
The crucial parts of an ideal order KPI are on-time delivery, accurate documentation and damage-free delivery. Each of them is crucial to determining customer satisfaction, and when analyzed together, they provide an overall assessment of your company’s performance.
Cash-conversion Cycle Time
Cash-conversion cycle KPI is essential when looking into the supply chain operations in detail. It refers to the time interval between payments made to suppliers and those received from clients. As a result, organizations will be more profitable if the supply chain KPI is low. Given that the operating capital is restricted for a brief period, it also implies that the delivery and storage areas are in good condition. T this KPI statistic will help firms understand how well supply chain assets like vehicles and workstations perform.
Order Cycle Time
The time between a customer making an order and receiving the product is called the customer order cycle time. It gives companies knowledge about the supply chain’s responsiveness and product service. A problem arises when the cash-to-cash cycle time rises, but the client order cycle time does not. You can gain the reason for this logic by considering specific crucial indicators, like the invoicing times, accounts payable and receivable.
The fulfilment rate KPI is the percentage of SKUs or packages dispatched on the initial attempt. It is one of the essential supply chain KPIs’ for monitoring line fill and order fulfilment rates. Understanding the fulfilment rate KPI is necessary to comprehend the supply chain’s in-full performance. The three major fulfilment rate measurements are:
- Order fill
- Line fill
- Unit fill
The percentage of completed orders on the initial shipment is measured by order fill. Line fill gauges the proportion of orders successfully delivered on the first shipment. Finally, the percentage of products successfully offered on the initial shipment is measured by unit fill. Fulfilment rate is therefore essential for businesses to gauge customer satisfaction and gain knowledge about the effectiveness and efficiency of their delivery service.
Days in Inventory
Reducing the days of inventory supply can help reduce the risks brought on by excess stock. The number of days an organization’s inventory may survive before needing to be replaced is called days in inventory. This KPI examines the stock kept in storage, enabling businesses to replenish it immediately before demand spikes or in the event of a stock-related tragedy, safeguarding their reputation and investments. Companies may track and assess this data daily and respond right away to restock supplies. This indicator tells you how much of your company’s operating capital is tied to inventory and whether it is declining.
More Information on Other Important Supply Chain KPIs
Besides the five critical supply chain KPIs mentioned above, there are a few more important ones. They are:
Freight Bill Precision
Freight bill accuracy helps businesses increase profitability and spot irregular billing practices. Possible problems include incorrect weights, inappropriate pricing, and a lack of information. The precision of a freight bill is calculated by dividing the number of error-free freight bills by the overall number of freight bills within a specific period.
DSO (Days Sales Outstanding)
This supply chain KPI shows how quickly you collect money from customers. A low DSO indicates a sound financial position. It shows that you are getting paid by your customers in less time. A high DSO, on the other hand, shows that you are taking longer to gain account receivables, which slows down your cash flow and has a negative effect on your bottom line. Thus, the finances are leaner, and company operations are more effective when the DSO is less.
The effectiveness of marketing, order fulfilment and production operations can be assessed using merchandise turnover. It shows how frequently your entire inventory is sold in a given time. Furthermore, your merchandise turnover ratio shows the efficiency utilized to turn the working capital invested in stocks into profits. A higher turnover rate is typically preferred, as a lower rate suggests inefficiency and trouble generating revenue.
GMROI (Gross margin returns on investment) provides data on the profitability of a corporate entity. It shows the actual profit from a stock investment. A GMROI of 200 to 225 is typically considered standard and denotes profitable operations. You may identify slow-moving goods in your inventory and utilize this information to optimize your company’s planning, production and warehouse operations by tracking GMROI monthly.
The best supply chain management will produce successful long-term outcomes. As mentioned above, numerous KPIs and indicators can be used by the best logistics company to assess the effectiveness of their supply chain management system and identify areas for improvement.