Supply chain leaders are constantly seeking an edge—they know that even a modesttechnical orprocess improvement, multiplied on the scale of modern supplier networks, can pay hugecompetitive and cost-saving dividends.
Often, though, where leaders run into problems is in quantifying the results of tweaks: Didthat new track-and-trace solution pay off as expected? Are we fully capitalizing on volumepricing? Should we condense shipments at the cost of a slight increase in average deliverytimes?
Our advice is to ask one more question: Are we collecting and analyzing the right metrics tomonitor the health of our supply chain and know whetherinvestments are paying off?
In this article, we’ll outline 22 top supply chain metrics and KPIs, provide theformulas tocalculate them, and discuss how dashboards can help track the success of your improvementsand updates.
What Are Supply Chain Metrics?
Supply chain metrics are the numbers and ratios a company tracks to measure how efficientlyit delivers goods to customers. Keys to efficiency in supply chain executioninclude how well and cost-effectively companies drive the flow of materials from procurementto delivery, including activities like production, warehousing and transportation.
The right metrics shed light on where to invest to achieve maximum returns.
Key Takeaways
- It’s vital to employ metrics and KPIs to assess how your supply chain isperforming.
- Important KPIs for finance include cash-to-cash cycle times and gross margin return oninvestments.
- Inventory turnover ratios and inventory velocity are two central gauges of how well yourcompany manages its intake and outflow of goods.
- A central KPI dashboard accessible to all stakeholders helps leaders stay on the samepage and prioritize resources.
What are supply chain KPIs?
Supply chain key performance indicators (KPIs) quantify how well a supply chain isperforming. Leaders need to decide which KPIs are most important to track.
Because there are many metrics that can add value, we often advise companies to divide supplychain KPIs into tiers based on functions. A company may decide on a bucket of top metricsthat are most important to its business and watch some lower-tier KPIs occasionally.
Top Supply Chain Metrics
Below are 22 key metrics to measure supply chain performance and management. We’vebrokenthem into four sections: top-level management, inventory, shipping and more general metricsthat apply to most industries.
Top-level supply chain management metrics and KPIs
Use these big-picture KPIs and metrics to measure whether your supply chain is runningefficiently or needs a tune-up.
Cash-to-cash cycle time:
This metric tells you the length of time between when you pay suppliers for materials andwhen customers pay for the final finished product. You want the cycle time to be as short aspossible.
Tracking this metric will help identify potential causes of cash flow issues. The mostefficient companies have cash-to-cash cycle times of less than one month.
Use this formula to calculate cash-to-cash cycle time:
Cash-to-cash cycle time =receivable days + inventory days – payable days
Customer order cycle time:
Customer order cycle time tracks the number of days between your company receiving a purchaseorder and completing customer delivery. It helps measure the responsiveness of your supplychain and how well you’re providing customer service.
Use this formula to calculate customer order cycle time:
Customer order cycle time= actual delivery date – purchase order creation date
Supply chain cycle time:
Supply chain cycle time measures how long it would take to complete an order if inventorylevels were zero. This KPI provides an overview of the efficiency of your entire supplychain.
Use this formula to calculate supply chain cycle time:
Supply chain cycle time =time it takes to order and receive supplies + order fulfillment cycle time
Service rate:
The service rate measures the percentage of product orders that are delivered on time.
Use this formula to calculate service rate:
Service rate = productorders delivered on time / product orders received
Perfect order index or perfect order delivery rate:
The perfect order index measures the percentage of your orders that are error-free frombeginning to end. That means the order was recorded correctly, shipped on time and in theright quantities and arrived without damage.
Use this formula to calculate the perfect order index:
Perfect order = [(totalorders – errors) / total orders] x 100
You also may want to track perfect orders with more details about where errors occur. Thatmeans you’ll want to track:
On-time delivery:
The percentage of orders that arrive as scheduled. Use this formula:
On-time delivery =[(total orders – orders that do not arrive on time) / total orders] x 100
In-full delivery:
The percentage of sales orders that are delivered completely in the first shipment. Use thisformula:
In-full delivery =[(total orders – orders that aren’t complete or are incorrect in first shipment)/ totalorders] x 100
Damage-free delivery:
The percentage of orders that are delivered without any damages. Use this formula:
Damage-free delivery =[(total orders – orders that arrive damaged) / total orders] x 100
Accurately documented order:
Percentage of orders in which all documents relating to the order are accurate. Use thisformula:
Accurately documentedorder = [(total orders – orders without accurate documentation) / totalorders]x 100
Businesses can track their perfect order indexes by using the simple formulas above. Butcompanies may also measure the index by multiplying their perfect order rates in variouscategories. For example, say you have a 92% rate of on-time delivery, a 95% rate for in-fulldelivery, a 97% rate in damage-free delivery and a 98% rate in accurately documenteddelivery.
Looks good, right? Take a moment to calculate your perfect order rate by multiplying eachpercentage, or 0.92 X 0.95 X 0.97 X 0.98. That would yield a less-than-stellar unifiedperfect order delivery rate of 83%.
Gross margin return on investment (GMROI):
The gross margin return on investment measures how much money a company makes on a specificinventory investment. Tracking this metric gives your company insight into which inventoryitems are especially poor or especially good performers. In general, a GMROI of 200 to 225is considered respectable.
Use this formula to calculate gross margin return on investment:
Gross margin return oninvestment = gross profit / [(opening inventory in the period – closinginventory in the period) / 2] x 100
Total supply chain management cost as percentage of sales:
Total supply chain management cost as percentage of sales is fairly self-descriptive. Itmeasures the total cost of your supply chain operations compared with your overall sales.
Use this formula to calculate total supply chain management cost as percentage of sales:
Total supply chain management costas percentage of sales = (total supply chain costs / total sales) x 100
Supply chain cost per unit sold: Supply chain cost per unit sold measuresyour supply chain costs compared with how many of a given item your company sells.
Use this formula to calculate supply chain cost per unit sold:
Supply chain cost per unitsold = supply chain costs for a product over period / number of units sold inthat period
Day sales outstanding: Day sales outstanding measures how quickly youcollect revenue from your customers. A low day sales outstanding number means you aregenerating revenue more quickly, which ultimately improves your cash flow.
Use this formula to calculate day sales outstanding:
Day sales outstanding =(receivables / sales) x number of days in a period
Inventory metrics and KPIs
Use these metrics and KPIs to measure how well your inventory operations are performing.It’sworth periodically running an inventoryanalysis exercise to help find ways to fill customer orders while keeping costs aslow as possible.
Inventory days of supply (IDS):
IDS represents the number of days it would take a company to run out of inventory if itdidn’t add to its supply.
It’s important to track this number to ensure your company doesn’t keep too muchinventory onhand, which ties up cash, but that it has enough to satisfy customer demand. That sweet spotis sometimes called the par level.
Inventory days of supply helps your company understand and maintain its par level. Use thisformula to calculate IDS:
Inventory days of supply= (average inventory in a month, in dollars / monthly product demand, in dollars) x 30
Days sales of inventory (DSI):
Days sales of inventory calculates the average number of days that inventory remained instock over a certain period. It’s a measurement of how long it takes a business tosell theitems it makes or buys.
Use this formula to calculate days sales of inventory:
Days sales of inventory =(ending inventory / cost of goods sold) x number of days in period
Inventory-to-sales ratio (ISR):
The inventory-to-sales ratio compares the inventory you carry to your overall sales.It’s ameasurement of the financial stability of your company. The ratio is closely related to yourinventory turnover ratio.
Use this formula to calculate inventory-to-sales ratio:
Inventory-to-sales ratio= inventory value in dollars / sales value in dollars
Inventory turnover ratio (ITR):
The inventory turnover ratiomeasures how often a company’s entire inventory is sold in a specific period. Whatcomprisesa “good” inventory turnover ratio depends on the industry. But in general, alower inventoryturnover ratio means a company may have excess inventory due to lagging sales.
Use this formula to calculate inventory turnover ratio:
Inventory turnover ratio= cost of goods sold in period / [(opening stock in period – closing stock inperiod)/2]
Turn-earn index (TEI):
The turn-earn index combines inventory turnover and gross margin to evaluate yourcompany’sprofits and use of inventory. In essence, the index recognizes that your company can get bywith less inventory turnover if it makes a lot of money on that inventory. But it needs moreinventory turnover if it realizes a lower margin on the inventory.
Generally, most businesses will want a turn-earn index of at least 150. Use this formula tocalculate the turn-earn index:
Turn-earn index =(inventory turnover ratio x gross profit percentage) x 100
Inventory velocity (IV):
Inventory velocity is the portion of inventory that your company projects it will exhaustwithin the next specified period. The metric helps your company set optimum inventory levelsso that you don’t carry too much inventory but retain enough to satisfy projectedsales inthe coming period.
An inventory velocity of 60% to 70% is a solid benchmark, with up to 80% for fast-movinginventory items. An IV above 80% is high and could lead to excess inventory, while inventoryvelocity below 60% is low and could presage shortages.
Use this formula to calculate inventory velocity:
Inventory velocity =opening stock / upcoming period’s sales forecast
Months on hand:
Months on hand indicates how many months of inventory you have at your disposal if youpurchase no more stock while your sales continue as forecast.
Use this formula to calculate months on hand:
Months on hand = (averageinventory for year / cost of goods sold for year) x 12
Stock rotations:
Stock rotations, also called stock life or stock coverage, refers to thenumber of days, on average, that it takes for you to run out of your inventory stock. It isbest to use the past 52 weeks to figure this calculation. That allows for enough time toshow seasonal and other variations. If you have a low stock rotations number, you riskrunning out of stock and failing to meet customer demand.
Use this formula to calculate stock rotations:
Stock rotations =(average stock in a period / total sales in a period) x number of days in the period
Supply chain shipping metrics and KPIs
Logistics managers may use these KPIs and metrics to determine if there are weaknesses in thenetwork of businesses and organizations working in a sequence of processes to produce anddistribute goods. As with inventory, it’s worth periodically taking stock of the logistics links in your supply chain.
Fill rate:
Fill rate is the percentage of customers’ orders that are filled on their firstshipments—animportant contributor to customer satisfaction. It’s also a measure of yourcompany’sefficiency.
Use this formula to calculate fill rate:
Fill rate = (1 –[(totalitems – shipped items) / total items]) x 100
You can also track specific aspects of fill rate, including:
- Order fill rate: The percentage of orders delivered on the firstattempt.
- Line fill rate: The percentage of order lines delivered on the firstattempt.
- Unit fill rate: The percentage of individual items delivered on thefirst attempt.
Calculate all three by substituting them into the fill rate formula.
Freight bill accuracy:
Freight bill accuracy measures the precision of your orders and shipping bills. Shipping thewrong items or the wrong amounts is wasteful and lowers customer satisfaction.
Use this formula to calculate freight bill accuracy:
Freight bill accuracy =(number of correct freight bills / total freight bills) x 100
Freight cost per unit:
Freight cost per unit measures how economically you ship your products. It measures yourtotal freight costs divided by how many units you’ve shipped. You can calculate unitsinpounds, items or any other measurement that makes sense.
Use this formula to calculate freight cost per unit:
Freight cost per unit =total freight cost / number of units
On-time shipping rate:
The on-time shipping rate is the percentage of times your customer receives product withinthe promised shipping window. Tracking this metric helps assess the efficiency of yoursupply chain processes. It can also help you pinpoint the proper “on-timedelivery”benchmarks for various products.
Use this formula to calculate on-time shipping rates:
On-time shipping rate =(number of items delivered on time in a period / total items shipped in the period) x 100
Other supply chain metrics and KPIs
These are a few other metrics and KPIs that can affect the supply chain.
Average payment period for production materials:
The average payment period for production materials is the average timespan between when youreceive materials and when you pay for them. By tracking this metric you can favor suppliersthat offer more favorable billing terms and thus improve your cash flow.
Use this formula to calculate average payment period for production materials:
Average payment period forproduction materials = (materials payables / total cost of materials) x days inperiod
Supplier on-time delivery:
Supplier on-time delivery measures the percentage of time your suppliers deliver products toyou in the agreed-on timeframe.
Use this formula to calculate supplier on-time delivery:
Supplier on-time delivery= (number of products supplier delivers on time in a period / total items supplier ships inthe period) x 100
Return reason:
The return reason measurement shows the top issues that cause customers to send items back.This can help you assess weaknesses in your product lines or operations and is important totrack given the high cost of reverse logisticsoperations.
The return reason measurement will quantify, in percentages, the top reasons customers sendgoods back and display them in a chart that’s easily consumable by supply chain andbusinessunit leaders, who can then take action to fix problems.
Order to cash:
While order to cash covers some processes outside of the supply chain, the performance of thesupply chain is an important component. Order to cash is a measure of the company’sentiresystem to receive, process and complete orders. It covers the time from when a customerplaces an order to when the company receives and records the customer’s payment.
What constitutes a good order-to-cash ratio depends on the industry, and this metric takesinto account the efficiency of your order management, logistics and accounts receivablefunctions.
Use this formula to calculate customer order to cash:
Order to cash = date ofcustomer order – date of receipt and recording of customer payment for order, afterreceiving order
Bottom Line
Clearly, there’s no shortage of KPIs and metrics that can provide supply chain andbusinessleaders with invaluable insights into their operations. Companies with automated datacollection, a central database and a customizable dashboard will have an edge in spottingareas to squeeze out costs and add efficiencies.
Supply chain managers should work with their finance and line-of-business colleagues toidentify the right KPIs while at the same time advocating for investments. Building moreresilient digital supply chains,for example, can reduce costs by as much as 20%, boost EBITDA, increase revenue by as muchas 6% and improve customer service by as much as 30%.
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Supply Chain KPI and Metrics FAQs
How can you use KPIs in supply chain analytics?
Data analysis tools are the key to making KPIs actionable. With the right metrics andpredictive analytics, companies can increase forecast accuracy, keep inventory levelsoptimized, improve logistics and shipping operations, maximize cash flow, and minimizecustomer returns.
The goal of supply chainanalytics is to find and fix inefficiencies in the supply chain, from raw materialsto finished goods and all points in between.
How do you measure the performance of a supply chain?
Ask: What’s our company’s differentiator? If you’re known for fast andaccurate orderfulfillment, track fill rate, freight bill accuracy and on-time shipping rate. Ifyou’re aretailer of fast fashion, then inventory to sales ratio (ISR), inventory turnover ratio(ITR) and your turn-earn index will be key.
In most companies, the finance team will want insights into cash-to-cash cycle time, averagepayment period for production materialsand gross margin return on investment (GMROI).
What are the drivers of supply chain performance?
Your company’s supply chain starts with accepting an order and ends with the customerreceiving and paying for finished goods. In that light, the drivers of your supplychain’sperformance are production, warehousing, inventory management, shipping andforecasting—including predicting future sales of your products.
You can also assess some aspects of supply chain performance through a supply chain visibility project.
How can you leverage supply chain management to improve your bottom line?
In many industries, margins are tight, and competition is fierce. Driving inefficiencies outof your supply chain is a way to improve the bottom line while, in many cases improving thecustomers experience.
Areas where money is often wasted include having multiple small or incomplete shipments goingto the same location or keeping too much inventory on hand rather than taking a “just in time”approach, whereraw materials arrive—and are paid for—just as production is scheduled to begin.
