Given that the supply chain is probably the foundation of your business, it’s important to ensure that it runs smoothly and efficiently. It’s vital that your products make it to your customer on time and at an affordable cost. If your products are late or arrive broken, if you charge less than you should, or if you don’t have the right inventory when it’s ordered, for example, your business could be negatively impacted. An inefficient supply chain can put a company out of business.
The good news is that there are many ways to take the temperature of your business and ensure that your processes are optimized and you know where any problems are. That’s where the supply chain KPI (key performance indicator) comes in. Supply chain KPIs are also known as supply chain metrics. While there are hundreds of supply chain KPIs, your company doesn’t need to use them all. Here we’ll share some of the top metrics that your supply chain management team may want to consider implementing.
What are supply chain KPIs?
Supply chain KPIs measure supply chain performance, so you can tell at a glance how different parts of your business are doing. Using supply chain analytics, you might measure inventory turnover and inventory levels in the warehouse, or freight cost and on-time delivery on the transportation end. These KPIs will be measured against your goals to see how well they are performing and whether there is any improvement.
When using KPIs, your performance will be continually evaluated. The performance can be evaluated against an industry benchmark, against your own past performance metrics, or even against different sites your company runs. When the supply chain leaders see a key performance indicator slipping, going in the wrong direction, they can act quickly to resolve the issue. It’s a great way to nip a problem in the bud before there are too many consequences.
A logistics KPI can be used with vendors as well, to measure how well the vendors are performing on a specified supply chain operation. Some companies use these performance metrics to decide when it’s time to switch to another vendor, if there are negative changes over time, or a vendor can’t improve their issues. KPIs allow a company to insist on operational excellence, whether providing a raw material or with customer service.
What are the 5 key performance indicators?
Given the high number of KPIs available, we’ll focus here on 5, concerning procurement and forecasting.
Customer order cycle time:
The customer order cycle time provides information about how responsive the supply chain is. It measures from the moment a company receives a purchase order from the customer to the time the customer receives the order. If the customer order cycle time rises, then there could be problems ranging from purchase order receipt, inventory management, supply variability, fulfillment, or delivery.
The fill rate measures the percentage of items or packages that are successfully fulfilled on the first try. To keep rates high, there must be enough inventory investment so that the forecast accuracy is correct and the proper products are available at the right time. This can be a problem if there is demand variability, like in holiday seasons or when ordering products for summer versus winter.
Inventory days of supply:
This supply chain management KPI measures the number of inventory days, or days your supply chain can handle without restocking with more supplies. To maintain this KPI, it’s important to have good demand forecasting, without retaining too much excess inventory, as that can harm your gross profit. Keeping the inventory days of supply KPI in a good position means you also aren’t likely to end up with obsolete inventory. Pay attention to your average inventory levels for this one.
Inventory turnover shows how often or how many times your inventory is sold or turned over completely in a specific period of time. This measure assists you in understanding order fulfillment efficiency and can shine a light on your marketing, sales, and production processes.
This is a KPI supply chain professionals track to give insights about the inventory percentage scheduled or estimated to be finished in a specific time range. If gives an understanding of inventory levels and warehouse processes, to allow the company to lower the possibility of having excess inventory or obsolete inventory. It allows the company to better plan for customer demand.
Though we promised you 5 key performance indicators, we’re actually going to give you a 6th. Because it’s important too.
Gross margin return on investment:
Gross margin return on investment is a KPI showing a company’s profitability. It incorporates the inventory costs. The KPI is measured by using the gross profit divided by the opening stock minus the closing stock (the inventory costs for that stock). Supply chain leaders can see which stock items are moving more slowly by looking at this KPI, to adjust planning and production.
How do you measure supply chain performance?
Measuring supply chain performance requires data. You’ll need data about the supply chain cost. You’ll need data about the logistics cost and the warranty costs. Presuming you’re using a warehouse management system or enterprise resource planning system, these data points should be readily available. If your supply chain operation or supply chain professionals can’t set up KPIs to track, your accountant should be able to do so.
Start off by choosing the KPIs that make the most sense to your business, and then you can always add more later, like looking at the sales ratio or cash cycle. It’s helpful to measure supply chain performance across warehouses or facilities, presuming you have more than one. That will help you pinpoint any issues in individual locations. And you can still look holistically at the organization in terms of global procurement activities.
What are the KPIs that measure supply chain performance?
By now you have a better idea about the KPIs that measure supply chain performance. There are a few other ways to improve your metrics, which means you’re improving your bottom line. These involve optimizing your shipping contracts and auditing your carrier invoices. Doing so will bolster your shipping and transportation KPIs, directly impacting your costs and product profitability. These actions are also low effort. Read our guide on ‘Transport Management System’ to learn more.
The first recommendation is to use an invoice audit recovery program. Shipware offers an invoice audit recovery program with a high rate of success. It usually saves clients 1% to 9% of their total invoices. The service is recommended for parcel, LTL, or FTL shipping. When you use an invoice audit recovery service, the software identifies invoicing errors, which can include a mistaken accessorial fee, delivery date issue, or missed service guarantee. The software works behind the scenes, automatically identifying mistakes and carrier errors and applying for the credit with the carrier on the shipper’s behalf. Those refunds come straight to the shipper’s account, with no shipper effort. It happens automatically, and is simple to set up. Since Shipware takes a percentage of the recovered credit, there are no out-of-pocket costs. If there is nothing to recover, there are no fees. This is an easy, time-effective and cost-effective way to improve key performance indicators for the shipping industry and save money.
The other recommended service that can be incorporated into KPIs, is carrier contract optimization. A shipper can renegotiate a carrier contract more than just at renewal time. Items can be negotiated when there are yearly carrier increases, or when a new player comes to town. Negotiation can be done with multiple carriers. The process involves delving into the shipping details and shipper’s nuances. The company’s own metrics would be compared to benchmarked data. It can be overwhelming for a shipper to spearhead this effort on their own. That’s why Shipware provides contract optimization services that can be used for parcel, LTL, and FTL freight services. Given Shipware’s deep bench of expertise and data, the company uses proprietary benchmarking data when comparing a shipper’s data to its peers. This is difficult, if not impossible, for a shipper to do on their own.
Shipware’s experts have decades of carrier experience on the other side of this negotiation process, giving them the knowledge of what terms to negotiate, and the potential wins for the shipper. Higher discounts are what shippers typically seek, but there are many other factors to negotiate that aren’t obvious. Working with Shipware to craft a negotiating strategy based on data and usage can decrease your company’s annual shipping costs by up to 30%.
While improving some of the supply chain KPIs mentioned here, look for easy wins like invoice audits that directly contribute to the bottom line and lower shipping costs. Shipware would like to help and can tell you more about how invoice audit recovery services and optimizing your contracts can improve your supply chain management KPIs. To learn more, please contact us at (858) 879-2020.