The global supply chain continues facing unprecedented disruptions, from the COVID-19 pandemic to the war in Ukraine. As a result, organizations are under immense pressure to optimize their supply chains and make them more resilient. Measuring supply chain performance through key performance indicators (KPIs) provides visibility into areas needing improvement.
As an expert in supply chain optimization with over 15 years of experience, I want to provide actionable insights to supply chain leaders on the 5 most critical KPIs to track in 2024.
1. Perfect Order Rate
The perfect order rate measures the percentage of orders delivered on time, in full, with accurate documentation, and no damage. This KPI directly impacts customer satisfaction.
To calculate:
(Number of perfect orders delivered / Total orders) x 100A 2021 study by SupplyChain247 found the average perfect order rate to be 83%. However, top-performing supply chains have rates exceeding 90%.
A higher perfect order rate indicates better supply chain performance. However, factors like inventory accuracy, supplier delivery performance, and logistics play a role. Improving relations across the supply chain can drive this KPI up. Here are some tips:
- Implement integrated inventory management systems for real-time visibility
- Collaborate with suppliers to agree on delivery timelines
- Optimize warehouse processes to pick, pack and ship orders quickly
- Leverage data analytics to identify process bottlenecks
2. Cash-to-Cash Cycle Time
The cash-to-cash cycle measures the time between paying suppliers and receiving payment from customers. A shorter cycle means less time between outlay and reimbursement.
It comprises:
- Days Inventory Outstanding (DIO) – Time raw materials are held as inventory
- Days Sales Outstanding (DSO) – Time to collect receivables
- Days Payables Outstanding (DPO) – Time taken to pay suppliers
According to a 2022 McKinsey working capital survey, top quartile companies have a cash-to-cash cycle of less than 0 days, while bottom quartile firms have cycles exceeding 38 days.
Reducing DIO and DSO while extending DPO improves cash flow. Supply chain managers should continuously evaluate payment terms and order cycles to optimize cash flow. For example, adopting just-in-time inventory management can reduce DIO.
3. Supply Chain Cycle Time
The supply chain cycle time measures the total time taken to fulfill an order. This indicates supply chain agility and resilience.
It includes:
- Order receipt
- Processing
- Manufacturing
- Shipping
- Delivery
A 2020 study by Gartner found that top-performing supply chains have cycle times of 90 days or less. In contrast, average performers take 120 days or more.
A shorter cycle time means the supply chain can quickly respond to changes in demand. Monitoring each step identifies process improvements to reduce cycle time. Advanced visibility tools help collect time-stamped data across supply chain nodes.
4. Inventory Turnover
The inventory turnover ratio indicates how efficiently inventory is managed. It measures how many times total inventory is sold during a period.
Inventory Turnover = Cost of Goods Sold / Average InventoryA high turnover indicates strong sales and healthy inventory management. However, inventory levels also depend on the product category. Supply chain managers should benchmark against competitors.
According to an IHS Markit survey, industrial supply chains have average turnover between 3-8 times annually. Optimizing inventory policies and adopting demand-driven approaches can improve this KPI. Integrated inventory management is essential for accurate tracking.
5. Fill Rate or Demand Satisfaction Rate
The fill rate or demand satisfaction rate measures the percentage of demand filled from stock. A higher fill rate means inventory is aligned with demand.
Fill Rate = (Demand Quantity - Backorders) / Demand Quantity Top-performing supply chains globally have fill rates exceeding 95%, according to McKinsey research.
Improving supplier relations and inventory planning using demand sensing improves this metric. Real-time visibility of inventory across the supply chain also helps optimize inventory to match demand.
Key Takeaways
- Select relevant KPIs to identify bottlenecks and improvement areas
- Leverage integrated supply chain software to enable end-to-end visibility
- Regularly review KPIs and their target levels as supply chains evolve
- Involve cross-functional teams to collectively drive performance
- Adopt emerging technologies like AI and automation to gain supply chain resilience
Measuring performance through KPIs coupled with digitization initiatives to connect siloed supply chain processes allows businesses to build resilient and responsive supply chains. Reach out if you need help selecting tailored supply chain software solutions. With over a decade of supply chain optimization experience, I can provide actionable guidance.