As a manufacturer or distributor, managing your supply chain at maximum efficiency is crucial to the success of your operations. If you don’t, you risk dissatisfied customers and losing your competitive edge. To keep everything running smoothly, it is critical to monitor your supply chain key performance indicators (KPIs) and act as soon as something starts to veer off course.
Supply chain logistics are tricky at the best of times. Even one area of bad performance can have a domino effect with negative consequences multiplying at a nightmarish rate. Maintaining control and warding off potential disasters is possible by keeping tabs on the right KPIs.
If you have the right tools for the job — starting with real-time transportation visibility — then you’ve won half the battle. Let’s look at the eight critical supply chain KPIs that can help you improve your supply chain efficiencies.
Supply Chain Metrics to Monitor
Key supply chain metrics to monitor will vary from operation to operation, including what logistics costs are as a percentage of sales. Some say that the average of 11% is way too high. With an accurate real-time overview that monitors essential metrics, you can identify weak links in your supply chain as well as cost-cutting opportunities.
The following KPIs are the ones to watch:
- On-time delivery (ETAs)
- Inventory to sales ratio (ISR)
- Carrying cost of inventory
- Purchase Order Tracking
- Days sales of inventory (DSI)
- Freight cost per tonne shipped
- Perfect order delivery rate
- Supplier on-time delivery
1. On-Time Delivery and Accurate ETAs
Having accurate estimated times of arrivals becomes more complex as the number of shipments and the number of destinations you serve increases. Getting your ETAs right is crucial because your products are part of other organizations’ supply chains. Any hiccup at any point on the supply chain causes hiccups further down the line.
FourKites’ Supply Chain Visibility Platform is one solution to this age-old problem, as it offers predictive, dynamic ETAs based on more than 150 factors, including weather, traffic and the number of stops.
OTIF (on time, in full) is a critical metric in the retail consumer sector. Simply put, consumers expect to see stock on the shelf. The supply chain challenge is to keep supply chain costs down while at the same time, ensuring that you help your customers meet their inventory control needs. This requires the correct quantity of goods to arrive within the agreed-upon timeframe.
Getting your OTIF metric right is often considered the most important KPI for supply chain efficiency.
Related to on-time delivery is the sub-KPI, Punctuality of Orders, where the number of orders delivered on time is divided by the total number of orders. The higher the rate, the more efficient the supply chain.
2. Inventory to Sales Ratio (ISR)
Any accountant will tell you that inventory is money sitting idle.
The ISR compares the average value of your inventory for a given period to net sales for that same period. This is just one metric, used chiefly in balance sheet analysis, that is related to a bundle of other metrics that give you an idea of the state of your inventory management. Others include:
- Average number of days you hold inventory before selling it (days inventory outstanding)
- Inventory turnover ratio measures how many times you sell and replace your inventory over any given period.
The ratio for days inventory outstanding is calculated by dividing the value of the inventory by the cost of goods sold (COGS), and then multiplying by 365. Since the ideal ratio varies depending on your industry, it is worth comparing your ratio with that of other companies in your industry.
Inventory turnover is the ratio of COGS to average inventory. If your company carries physical inventory, then this might be a significant ratio to watch.
An increase in the ISR may indicate that your investment in inventory is growing quicker than your sales, or that your sales are decreasing. If the ISR decreases, it could mean that your investment in inventory decreases in relation to sales or that sales are growing.
3. Carrying Cost of Inventory
As a KPI, the carrying cost of inventory a more reliable benchmark than ISR in supply chain analysis. Carrying costs are usually 20-30% of the total cost of inventory, but will vary with your industry and business size. Use the following formula when calculating your inventory carrying cost:
Inventory carrying rate x Average inventory value
Any inventory you purchase has a cost associated with it. These costs would include labor, insurance, warehousing and freight. This metric is useful when calculating how much profit you can make from your current inventory. Indicators for success under this rubric are low costs and a high inventory turnover ratio.
Accuracy is also critical when compiling inventory data. It has been shown that inventory accuracy improves performance on logistics metrics. So when you improve your inventory visibility — and therefore accuracy — you not only reduce your inventory carrying costs and the incidence of stock outages, you also improve other logistics processes, such as the receipt of inbound materials from your suppliers and order processing in general.
4. Purchase Order Tracking
Your order status metrics are definitely something you’ll want to track on the dashboard of your supply chain visibility platform. If anything gives you an immediate indication of any potential glitches in your supply chain, it is this particular set of metrics.
For instance, purchase order tracking section of the FourKites dashboard, you can track multi-modal shipments by purchase order number and across suppliers. Real-time, product-level data on all orders in transit is updated every 15 minutes, and each order is color-coded to highlight order status.
Not only does this tool monitor the date and status of your orders, but it also encompasses information related to the accuracy of your inventory discussed above.
Supply Chain KPIs Are Interrelated
Real-time visibility means you will be able to predict your inventory needs with greater accuracy and reduce your safety stock (the inventory sitting around doing nothing). Lower inventory levels mean lower carrying costs and less risk of ending up with obsolete stock.
A secondary effect here is that purchase orders received becomes more agile in nature, and could even result in your company developing a greater ability to fulfill bespoke orders, giving you an additional competitive edge. While this is not a supply chain KPI, it could well be a performance indicator that could be monitored by the company as a whole.
5. DSI – Days Sales of Inventory
DSI is the average number of days your company takes to sell its inventory. This metric is useful when analyzing your sales efficiency. A high DSI could indicate that you are not managing your inventory properly, or that these inventory items are hard to sell. (If the latter is the case, take the remedial action by getting your Sales and Marketing teams involved — a clear example of how supply chain KPIs can help eliminate problem areas.)
Other statistics for reporting purposes could be expressed as “weeks on hand” or “months on hand” per SKU (stock-keeping unit).
6. Freight Cost Per Tonne Shipped
Knowing your freight costs is essential for correct pricing and avoiding operational losses. You might be paying more for freight, given the downward pressure on prices experienced in the freight industry earlier this year and the ongoing uncertainty and volatility in the market.
Calculating your total freight costs by the number of units you’ve shipped per period will give you an accurate reflection of how well you are managing these costs. This metric can be calculated per mode (rail, sea, truckload, less-than-truckload, small package, air freight, intermodal, etc.).
Getting an overview of your spending across modes can be essential to the survival of your business. It will also give you insight into untapped opportunities.
7. Perfect Order Delivery Rate
Perfect order delivery rate is an “outward-facing” KPI, meaning that you can leverage it as a serious selling point to your customers. This metric is expressed as a percentage of perfect orders you delivered out of the total number of orders delivered. Your company can set its own measurable criteria to determine what constitutes a perfect order.
Note that you can only hit your targets on this KPI if you are tracking correctly on all of your other KPIs.
8. Supplier On-time Delivery
In any logistics supply chain, your company wears two hats. We have written this article from the point of view of your company being the supplier. But you, too, have suppliers that you rely on. If you succeed in achieving your supply chain KPIs, then your suppliers have to be at least as efficient as you are.
In other words, OTIF applies to your suppliers, as well. Particularly if you supply your markets with a specific, select range of products, then you might want to consider including an inventory management agreement with your key suppliers. Such agreements typically include quantities and schedules for key SKUs.
Strategic Planning Is Key
Top KPIs for supply chain management will differ from one company to another. To determine the KPIs that make the most sense for your business, it’s important to undertake a strategic planning process that involves all supply chain departments. Brainstorming and benchmarking are the first steps in agreeing on your KPIs, after which point you can set appropriate targets.
To learn more the supply chain visibility solutions that can help you achieve your KPIs, don’t hesitate to contact us.