Any manufacturing enterprise is as good as its supply chain. An inefficient supply chain can affect the business from all corners – inventory mismanagement, increased warehouse cost, incessant stock fluctuation to poor vendor relations, high production cost and lack of customer satisfaction.
According to the 2019 IBM C-suite study, 84% of Chief Supply Chain Officers stated that lack of visibility across the supply chain is the biggest challenge they face. So, what it takes to build a robust supply chain?
Today’s complex and ever evolving supply chain demands robust data analytics and reporting mechanism to optimize the supply chain. Real time insights from all data sources not only provide insights into overall health of the business but help build efficient supply chain with data driven decision making related to stock management and on-time deliveries.
With the help of modern Business Intelligence (BI) solutions, successful manufacturing companies monitor their supply chain performance through key metrics. Supply Chain metrics are important as they define overall expectation a company has against their immediate competitors in the similar business.
Supply Chain metrics should be defined accurately to align company’s overall mission statement like, “Thrive to meet Customer Order expectation with 99% service level.”
While the list of supply chain KPIs is vast, to support such a goal, leadership would be enticed to review the performance through the below five key KPIs:
1. Perfect Order
Easily the most important metric for measuring the effectiveness of a supply chain, the Perfect Order KPI is a compound of several important metrics that give you insight into several areas of your order fulfilment process. It can also help you track your storage and delivery operations, manage costs, and gauge customer satisfaction.
Some of the most important components of the perfect order KPI include:
The Perfect Order KPI can help you determine customer satisfaction. For instance, if you have a low percentage of on-time or damage-free deliveries, it indicates that your customers aren’t getting their orders on time. These components will also reveal additional costs incurred by giving refunds and offering returns to customers.
The formula for measuring the Perfect Order KPI is:
((Total Number of Orders – Number of Error Orders) / Total Number of Orders) * 100
Where number of error orders refers to the key component (on-time, in-full, damage-free, or accurate documentation delivery), you’re measuring.
2. Cash-to-Cash Cycle
Although cash to cash cycle time sounds like a strictly financial ratio, it also reveals important insights about your supply chain operations. It shows the number of days it takes between paying for raw materials and getting paid for the products you sell.
A low value of this supply chain KPI indicates an increase in leanness and profitability. It also shows that your storage and delivery services are in good health because your operating capital is tied up for a shorter duration.
This KPI can also enable you to determine the efficiency and effectiveness of your supply chain assets including shelves, workstations and trucks.
Here is how to calculate cash to cash cycle time:
Materials Payment Data – Customer Order Payment Date
Cash to cash cycle reveals the time it takes your business to pay your suppliers for materials to the time it receives payment from the customer. The shorter the time, the better.
3. Customer Order Cycle Time
Customer order cycle time gives you important insights related to product service and supply chain responsiveness. It depicts the period between the moment a purchase order is received from the customer and the moment the order is successfully delivered to the customer.
If you see that the cash-to-cash cycle time is increasing, but the customer order cycle isn’t, it indicates issues with the former. Examining other vital metrics like invoicing times, account payables, and account receivables can help you find the cause.
Here is the formula for calculating the customer order cycle time:
Actual Delivery Date – Purchase Order Creation Date
Some businesses use a variation of the above formula to calculate the promised customer order cycle time:
Requested Delivery Date – Purchase Order Creation Date
4. Fill Rate
The fill rate, also known as the demand satisfaction rate, is the amount of customer demand that is met through stock availability, without backorders or lost sales. Knowing your fill rate is important because it represents the sales you can recover or service better if you improve inventory performance.
One method for improvement is access to inventory data. The better you and your sales team understand available inventory, the better able you are to ship accurate, complete, and timely orders, improving customer satisfaction along the way. For instance:
The formula for calculating the Fill rate of a supply chain is:
((Total Number of Items – Number of Shipped Items) / Total Number of Items) * 100
Fill rate helps you gauge customer satisfaction and gives insights into the efficiency of your delivery service.
5. Inventory Days of Supply
Inventory days of supply represent the number of days your inventory can sustain without restocking. This supply chain KPI helps you track the amount of inventory in your warehouse so you can replenish it just in time before demand gets high or in case of a stock-related catastrophe – while saving your reputation and investments.
You can monitor and analyse this information on a day-to-day basis and take action to refill stocks promptly.
Here’s how to calculate inventory days of supply:
Inventory on Hand / Average Daily Usage of Inventory
Reducing the inventory days of supply can help you minimize the risks of surplus and outdated inventory. If you see that this metric is decreasing, it means that less of your operating capital is tied to inventory (in other words, your business is getting financially leaner)
The Conclusion
It is critical for leaders to carefully evaluate the metrics that will help them reach their organization’s supply chain goals. So, identifying and presenting metrics with strong historical data through presentable Supply Chain dashboard becomes necessary for optimizing supply chain.
