Written by Marijn Overvest | Reviewed by Sjoed Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
KPIs in Supply Chain — Everything You Should Know
As taught in the Category Management in Procurement Course / ★★★★★ 4.9 rating
Key takeaways
- Supply Chain KPIs are constructed parameters that define how well your supply chain is doing.
- KPIs help companies improve approaches to make their supply chains stronger and more flexible.
- It is important to determine which KPIs define your supply chain’s performance so that you may adjust your processes accordingly.
KPIs in the supply chain are important as the supply chain is the backbone of any modern business. Without it, many companies will fail to deliver their products which will affect their profitability and brand.
In this article, we will discuss what KPIs are and their importance in the supply chain. We will also tell you the KPIs in the supply chain that you need to measure to improve your processes.
Once you read this article, you will know the KPIs that are crucial in measuring your processes. Thus, allowing you to see the opportunities and risks in your processes.
SupplyChain KPIs Explained
Supply chain KPIs, also known as supply chain metrics, are established parameters that are used to quantify and define the performance of the supply chain. To simplify, these are tools to measure how good your supply chain is doing.
Supply chain KPIs help the company to measure the effectiveness and cost of its supply chain. It allows the companies to evaluate themselves to know if they are meeting their objectives and goals with their supply chain KPIs.
However, you must take note that KPIs vary from one industry to another. Also, each department of the company can have distinct KPIs from other departments. Thus, KPIs cannot be right or wrong. It can only be relevant and useful within a specific context. A KPI for a particular project may be irrelevant to other situations.
Through KPIs, companies can spot their inefficient process and help them to capitalize on their strength and create goals that will help their supply chain.
The Importance of KPIs in the Supply Chain
Supply chain operations became more relevant due to the global pandemic. Many companies are now stepping up their game to improve their supply chain to mitigate all the risks that they may encounter in the following years. Thus, supply chain KPIs are important to monitor its operations.
We all know that you can never know what to improve if you do not know how to assess the processes that you want to improve. KPIs allow companies to track their processes if it is still aligned with their goals.
TheMain Categories of KPIs in the Supply Chain
Key performance indicators or KPIs vary based on different factions, depending on what it requires. Here are the main categories of KPIs in the supply chain:
1. Time
Time-based indicators are easy to understand and calculate. The time to process your orders and the time to deliver the orders are some examples of time-based performance indicators.
2. Cost
In order for the company to know its profitability, it needs to have a great cash flow. Cost metrics help companies to know areas of fiscal inefficiency and make the necessary changes to become more profitable.
3. Quality
This performance indicator is quite rare. However, it is important as it improves customer satisfaction that every business needs, especially those that are establishing their brand. The quality of the products and services sold should continuously improve to keep up with the expectations of the customers.
SupplyChain KPIs You Need to Measure
Now that we’ve discussed the different categories specific supply chain KPIs can belong to, let us now move on to the different definite supply chain KPIs you need to measure. These are the following:
1. Perfect order rate
The perfect order rate is a metric that gives you insight into several areas of your order fulfillment process. Some people regard it as the most effective metric to measure the effectiveness of the supply chain.
The perfect order rate can help the company track its storage and delivery operations, control costs, and evaluate customer satisfaction.
2. Cash-to-cash time cycle
The cash-to-cash time cycle is a metric that will help you estimate the length of time required to transform your resources into effective cash flows.
In a cash-to-cash time cycle, the shorter the conversion cycle the better. This metric help you take the right measures to know how you can run the operations with less money tied to it.
3. Freight Bill Accuracy
Shipping your items from a supplier to a warehouse to the consumers is crucial to the success of the entire operation. Thus, any errors can prove to be harmful with investments and time being wasted.
These metrics will help you know detrimental trends and enhance your overall shipping accuracy. Thus, helping your business grow further.
4. Inventory turnover
This metric will reveal insights that will help you know about the times your entire inventory is sold over a specific period.
Inventory turnover helps companies to measure their efficiency in order fulfillment, sales and marketing operations, and production processes.
5. Warehousing cost
The management of your inventory space is critical in creating a healthy supply chain. Although the cost distribution varies from different warehouses, is it important to measure this to identify opportunities and decrease unwanted costs.
The management of the warehouse facility includes labor costs, warehouse rent, equipment costs, utility expenses, storage costs, supplies costs, and costs of orders.
6. Fill rate
This metric will give you a clear view of the percentage of your customer’s orders that are fulfilled the first time around.
The fill rate metric is linked to your brand reputation and customer satisfaction levels. You can assess your fill rates with the orders delivered, lines delivered, or items delivered for the first time.
7. On-time delivery
The company’s ability to deliver its products on time is an important factor in purchasing orders. This is due to the fact that your customers will go buy somewhere else when you fail to deliver what they need on time.
The on-time delivery metric is measured as the percentage of orders delivered on or before the date which you have promised.
8. Return ratio
This metric is important to supply chain management, especially to an e-commerce company. The return ratio provides insights into the reasons why customers return the items they have ordered.
This metric is usually presented in a pie-chart format with the main factors why customers return their products.
By knowing the reasons behind the return of the items, you have a great chance of decreasing their returns, boosting your profits, and improving your cash flows.
Conclusion
Supply chain KPIs or supply chain metrics are constructed and established parameters that quantify and define how your supply chain is doing.
Moreover, these also measure its effectiveness and also identify the costs. Thus, they help companies and organizations evaluate their processes if they meet their objectives when it comes to their KPI goals.
Supply chain KPIs help the company to measure the effectiveness and cost of its supply chain. It allows the companies to evaluate themselves to know if they are meeting their objectives and goals with their supply chain KPIs.
With that, it is also important to note that there are several categories of KPIs in the supply chain and each category also have certains KPIs that vary from one industry to another.
Frequentlyasked questions
What are KPIs in the supply chain?
These are established parameters that are used to quantify and define the performance of the supply chain.
Why is it important in the supply chain?
Supply chain KPIs are important to monitor and measure the efficiency of the company’s operations.
Are all KPIs the same for each supply chain?
No. The KPIs of the supply chain varies for each company as they have different processes. However, some companies have almost identical KPIs in the supply chain as some KPIs are crucial for that specific process.
What are the main categories of KPIs in the supply chain?
KPIs in the supply chain fall into three categories which are time, cost, and quality.
What is the maximum KPI?
Each strategic objective is advised to have one KPI but not more than 3 to be associated with it.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
