An effective supply chain is essential to survive in today’s competitive business environment and increase your revenue. According to a survey by Deloitte, 79% of companies with high-performing supply chains achieve revenue growth superior to the average within their industries. One way you can determine if your supply chain performance is satisfactory is by monitoring your supply chain metrics (or KPIs), which are a set of parameters used in quantifying and defining the performance of your supply chain. Here are the 10 key performance indicators you should monitor to optimize your supply chain management.
1. Inventory Turnover
Inventory turnover measures the number of times inventory is sold in a specified period.
To calculate inventory turnover, use the following formula:
Cost of Goods Sold / Average Inventory
A high turnover indicates that your products sell out quickly, that there is high demand for your products. If your inventory turnover rate is below industry benchmarks, you may be overstocking. To improve your inventory turnover, invest in proper forecasting, and inventory automation software.
2. Inventory Accuracy
This metric measures the accuracy of your inventory by comparing physical inventory with what’s recorded in your database. Maintaining inventory accuracy can help reduce inventory carrying cost and stock outages.
To calculate inventory accuracy follow this formula:
Database Inventory Count / Physical Inventory Count
Your goal is to get an inventory accuracy rate between 95% and 99%. Ways to increase inventory accuracy include establishing good inventory naming and labeling practice. You can also leverage warehouse management and inventory management systems to eliminate manual data entry and reduce human error.
3. Order Fill Rate
Order fill rate is the number of customer orders a company can ship immediately from available stock. Order fill rate helps you gauge how well you’re meeting customer demand and the efficiency of your delivery service. The formula for calculating the fill rate of a supply chain is:
Total Number of Customer Orders Shipped / Number of Customer Orders Filled x 100
According to a report by the Tompkins Supply Chain Consortium, leaders in fill rate are exceeding 98%, and the average hovers just under 95%.
A low order fill rate can be improved with proper demand forecasting, setting inventory replenishment parameters to prevent out of stock issues, and providing alternatives for out of stock items in inventory.
4. Perfect Order Rate
Perfect order rate measures how much orders you ship without errors or deviations. This metric helps you track your storage and delivery operations, manage costs, and gauge customer satisfaction.
Four factors contribute to achieving a perfect order: the delivery must arrive complete, on-time, undamaged, and with proper documentation.
Perfect order performance is calculated as follows:
(Percent of orders delivered on time) x (Percent of orders complete) x (Percent of orders damage free) x (Percent of orders with accurate documentation) x 100.
Data from the American Productivity and Quality Center shows that, at the median, organizations have a perfect order index of 90%. Steps you can take to improve your perfect order performance include improving your ability to take orders correctly, allocating inventory quickly, delivering products on time and sending accurate invoices.
5. On-Time Shipping
On-Time Shipping measures the ratio of orders that have been shipped on or before the requested ship date. This metric lets you track your delivery performance and is key to ensuring customer satisfaction.
It can be measured by:
(Number of On-Time Items / Total Items) x 100
A high on-time shipping rate indicates an efficient supply chain operation. While a poor on-time shipping rate means orders take too long to reach customers. It’s essential that you resolve poor on-time shipping issues fast to avoid losing customers.
Backorders are orders that cannot be filled at the time a customer places them. To calculate the backorder rate use this formula:
Number of undeliverable orders/by the total number of orders x 100.
Consistent large backorders with long wait times can be an indication that something is wrong. You can reduce backorders by using an inventory system to get real-time data on your stock levels and to reorder products before they go out of stock automatically.
7. Order Cycle Time
Order cycle time, sometimes referred to as inventory cycle time, measures the average cycle time it takes for a customer to receive a product after placing an order. The formula of this metric is the following:
Actual Ship Date – Customer Order Date
Short order cycle times indicate you’re responsive to customer orders. On the other hand, long order cycle times mean your operations aren’t in sync with one another. Review all of the processes that go into picking and shipping orders and see where you can automate some processes to save time
8. Inventory Days on Hand
Inventory days on hand measures the average number of days it takes for a firm to sell off inventory. This metric lets you know when it’s time to restock your inventory levels.
You can calculate inventory days on hand with this formula:
(Average Inventory for the Year / Cost of Goods Sold) x 365
If your inventory days on hand rate is high, this could indicate that you’re not properly managing your inventory or having inventory that is difficult to sell.
9. Rate of Return
Rate of return metric measures the rate at which shipped items are returned to you.
This metric can be calculated with the formula:
Total Items Returned / Total Items Shipped
The key to getting insights from your return rate is to find out why your customers return their orders. This will help you spot weakness in your supply chain, and make necessary improvements.
10. Order Picking Accuracy
Order picking accuracy lets you know the percentage of your orders that are picked for shipping accurately. Incorrect picks result in inaccurate inventory, delayed shipments, and unhappy customers. You can calculate order picking accuracy using this formula:
Total Number of Orders / Perfect Order Rate
According to the 2019 DC Measures annual benchmarking study conducted by the Warehousing Education and Research Council, best-in-class operations achieve more than 99.89% order picking accuracy.
To increase your picking accuracy, pick items based on item code, and use automation as much as possible. You can also group similar items to make inventory easier to locate and reduce picking time.
Monitoring the efficiency of your supply chain is crucial to ensuring customer satisfaction and having a competitive advantage. Tracking many metrics can become unmanageable quickly, so track a few metrics that are relevant to your bottom line. If you don’t have the time or resources to track and analyze your supply chain metrics (KPIs), partner with a third-party logistics provider (3PL). They have the tools and expertise you need to monitor your supply chain performance metrics and improve your operations.
If you are looking for a 3PL partner to work with we would love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.