8 min read
12 Jun 2023
8 min read
12 Jun 2023
The importance of a business’s supply chain to its overall operational health can’t be overstated. A poorly-run, non-strategic, or unoptimized supply chain can expose your business to various external risks. It can also negatively affect your working capital position, tying up cash in the form of excess inventory.
In short, failing to maximize supply chain operations performance can hinder business growth. Research by consulting group Kearney found that over half of consumer product companies risk missing out on growth opportunities due to inefficient supply chains.
By improving supply chain performance, you may be able to reduce operational costs, exceed customer expectations, and improve your bottom line. But before you can think about making supply chain improvements, you first need a system to measure the performance of your supply chain.
There’s a broad range of supply chain metrics to choose from. Still, the following list summarizes the most useful supply chain key performance indicators to track when it comes to improving performance:
Perfect order delivery rate (POR) measures the percentage of orders placed that are fulfilled perfectly by your suppliers.
The simplest method to calculate POR is to take the total number of orders for a given period and calculate the fulfillment percentage against a set of chosen criteria that define a successful order. The product of these can then be expressed as the POR.
You can use POR to measure your suppliers’ performance, individually or aggregated across your whole supplier base. You can also use it to measure your performance in delivering goods or services to customers.
Another of the KPIs in supply chain management, inventory carrying cost, measures the costs incurred due to holding your current inventory levels. These include storage costs and insurance, for example.
Inventory carrying cost can be expressed either as a monetary figure or as a percentage, which is calculated as follows:
You can use this metric to identify opportunities for improvement in your inventory management strategy.
Order fill rate measures the percentage of customer orders immediately fulfilled by available stock on hand. As such, it shows how well your business’s supply chain strategy is geared to meet customer demands.
This KPI is also known as the demand satisfaction rate because the prompt fulfillment of orders is closely tied to customer satisfaction. A higher rate should result in stronger customer relationships, increased sales, and an enhanced brand reputation.
As well as giving an overview of total order fulfillment, order fill rate can be used to gain different insights into the performance of specific products.
The customer order cycle time measures the average time taken to deliver an order after it has been received. It is calculated as follows:
Customer order cycle time is one of the supply chain KPIs that can be used to measure your performance in customer service. You can also use it to pinpoint bottlenecks in the order cycle, streamline the process and reduce average cycle time.
Inventory turnover rate shows how many times your business sells and replaces its inventory in a given period relative to the direct costs of producing the goods sold. You can calculate it with the following formula:
A high ratio can indicate strong sales but could also result from insufficient inventory. Likewise, a low ratio could suggest weak sales or a sign that your business is carrying too much inventory and managing its inventory poorly.
Using the same data as inventory turnover rate, days inventory outstanding (DIO) measures the average number of days a company takes to turn inventory into sales. It’s calculated using the following formula:
A large value indicates that a business is not converting inventory into sales quickly. In contrast, a small number may indicate that the business has a high turnover and is more efficient in selling inventory.
Generally speaking, the shorter your DSO, the faster your business collects payment from its customers. This metric is important in understanding how successful your supply chain strategy is to your working capital objectives.
On the other hand, days payable outstanding (DPO) measures the average number of your business takes to settle its accounts payable.
The higher a company’s DPO, the longer the business takes to pay its bills. It serves the same rough purpose as DSO. You can understand how your accounts payable strategy impacts your working capital position by measuring DPO.
Unlike other KPIs in supply chain management, the cash conversion cycle (CCC) measures the full supply chain process across purchasing, inventory management, and sales. Calculated as follows, the CCC shows the number of days it takes your company to convert cash spent on inventory back into cash received through sales:
CCC is one of the most widely used supply chain KPIs, a broad indicator of operational efficiency, liquidity risk, and overall financial health. It can be improved by addressing any or all of its three inputs, namely DIO, DSO, and DPO.
Finally, supply chain finance utilization rate measures the percentage of orders that are paid for using supply chain finance rather than cash. By tracking this metric, you can identify whether your existing supply chain financing solutions – supply chain finance, dynamic discounting, and virtual cards – are fully utilized.
Each of the above supply chain KPIs – and the many other existing supply chain metrics – can be used to measure distinct elements of your company’s overall supply chain performance. By establishing appropriate KPIs and regularly assessing performance against them, you can monitor the strengths and weaknesses of your supply chain and identify opportunities for improvement.
Supplier management software, for example, can be used to manage processes such as selecting suppliers, negotiating contracts, controlling costs, reducing risks, and ensuring service delivery. With inventory management software, meanwhile, businesses can track the movement of goods through their entire journey, from origination to their ultimate destination.
Finally, you can use payables solutions such as supply chain finance, dynamic discounting, virtual cards, and invoice automation to reduce costs, support your suppliers’ cash flow, and create a more resilient supply chain.
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