A supply chain has various moving parts and layers that make up a well-oiled machine.
As a supply chain manager or supervisor, it’s imperative to remain vigilant and proactive, as one issue in one of the layers can easily cascade to other areas and derail the system.
Although you can’t be everywhere all at once, technology can, and by carefully choosing key performance indicators (KPIs), you can track every facet of the supply chain.
In this article, we dive into 33 KPIs you can track for efficient supply chain management. We would share why they’re vital and a few actionable tips about each KPI.
1. Inventory turnover rate (ITR)
The inventory turnover rate (ITR) is the ratio of the cost of goods sold over a period divided by the average inventory over the same period.
(ITR = cost of goods sold / [(opening stock - closing stock)/2]).
The higher the ITR, the better. A higher ITR shows that you’re turning over goods faster, while a lower ITR means goods stay on your shelves or warehouses longer than necessary.
Companies can also use the ITR to estimate the average inventory period, that is, how long a product may stay on the shelves before it’s exhausted.
So, let’s say a particular product has an ITR of 4 for a year. Then, it would take 91.25 days (365/4) to sell.
The ITR is a valuable metric for monitoring consumer demand, adjusting pricing, running promotions to deplete inventory, changing product mix, and more.
2. Supply chain cycle time (SCCT)
Want to assess the efficiency of your entire supply chain system? The supply chain cycle time (SCCT) is a great KPI for answering this question.
Let’s assume you have zero inventory for a product, and a customer makes an order for the same. How long would it take your company to deliver the product to the customer?
In essence, it measures how soon a product moves through your entire supply chain pipeline - from sourcing to the customer’s doorstep. The total SCCT will include elements like:
Time to order raw materials
Processing time
Packaging and distribution time
Order fulfillment cycle time
A higher SCCT indicates potential bottlenecks or subpar systems hindering quicker turnaround, while a lower SCCT indicates an efficient process.
3. On-time delivery (OTD)
ABC Company had 50 orders in May, with a promised 3-day turnaround for each delivery. The record shows that only 35 customers received their orders on time. The company had 15 unhappy customers, which may impact future sales.
The formula for OTD is:
[orders delivered on time / total orders] * 100
For ABC Company, the OTD for May is: (35/50)*100 = 70%
The closer the number is to 100, the better. If OTD is consistently low, it may be prudent to increase delivery time to allow you more time to fix underlying issues.
There are many potential reasons why the OTD may be slipping off a cliff. This includes poor forecasted estimated demand, disruptions to production, errors during production, poor last-mile delivery partners, and more.
You may explore options like better demand forecasting, routing optimization, and partnering with another last-mile delivery company to rectify these issues.
That said, thoroughly investigate the root cause before adopting any potential solution.
4. Perfect order measurement (POM)
Error-strewn products can have a massive impact on your brand and its profitability. Customers will complain, leave you bad reviews, and tell others about the poor service or product they received.
The perfect order measurement helps supply chain managers gauge the percentage of error-free products.
The formula to calculate POM:
[(total orders - orders with errors) / total orders] * 100
The closer the POM is to 100, the better. This means fewer returns and complaints and reduced supply chain costs.
For greater visibility into where the vulnerabilities are, some businesses also calculate the POM for every phase of the supply pipeline: sourcing, production, delivery, and storage.
You may also like: How to Track Performance Metrics (Beginner's Guide).
5. Turn-earn index (TEI)
The turn-earn index (TEI) is another vital supply chain KPI. It's useful in identifying slow-moving inventory that is profitable. Think of the TEI as an extension of the ITR, but this time, the ITR is balanced with the gross profit margin.
The formula for TEI is:
TEI = (inventory turnover ratio * gross profit percentage) * 100
Gross profit percentage = (Gross profit / Net sales) * 100
By calculating the TEI for each product or category, you can make informed decisions on what products to keep in your product mix.
So, a product may leave your shelves quickly but offer lower profit margins than slower-moving products.
6. In full delivery (IFD)
In full delivery and on-time delivery are two supply chain metrics you can use to assess the performance of your logistics service.
How many times have you ordered food and found that the restaurant didn’t include ketchup with your chips? That’s an incomplete order.
In full delivery means the customer got everything they ordered. So, this rate measures how many orders you completed in which the customer received everything they ordered at the first shipment. The formula for IFD is:
[(total orders – orders incomplete or incorrect) / total orders] * 100
A lower IFD may be due to poor attention to detail, pilfering by the last-mile delivery personnel, human error, and production issues.
Track and link all your essential KPIs to your strategic objectives with Kippy. Kippy is a leading performance management tool with comprehensive KPI and reporting features for eagle-eyed supply chain monitoring.
7. Order return rate (ORR)
Customers return at least 20-30 items out of 100 in the ecommerce industry, according to Shopify. A poor order return rate may be caused by one or more of the following:
Unprotective packaging and delivery best practices, like piling heavy items on top of fragile ones
Unclear or misleading product information
While all returns will not be your fault (at least 10% are fraudulent), an ORR trending upwards is a cause for concern. The formula for ORR is:
ORR = (Total items Returned / Total Items Shipped) * 100
Dig into your supply chain to find weaknesses causing customers to return products.
It can be as simple as introducing a confirmation page for customers to review their orders and perhaps reaching out for orders above a certain threshold.
8. Fill rate (FR)
As a business, you have limited resources, limited employees to process orders, limited shelf space to display items, restricted warehouses for product storage, and more.
You can only store so much inventory, which may impact your ability to meet customer expectations. Balance how much stock you keep in inventory with customer demand to ensure you can fill most orders for a product.
Fill rate measures the customer orders you can fulfill with the stock on hand. There’s also a clear nexus between fill rate and customer satisfaction. Being unable to fill an order leads to poor customer satisfaction.
The formula for fill rate is: (Total orders shipped / Total orders placed) * 100
9. Pick-to-ship cycle time
Pick-to-ship cycle time is the difference between “when an order is released to be picked until the time the order has been shipped.” There are three layers to the PPCT, including
Time to pick up an order from storage or warehouse
Time to prepare and pack the order for shipping
The time it takes to place the order with a shipping carrier
The time the order spends in transit is excluded from this calculation. It’s more of a measure of your in-house efficiency.
The pick-to-ship cycle time is part of a set of Cycle Time metrics to measure how well your warehousing processes are.
10. Average payment period for production materials (APPM)
Supply chain performance can significantly affect other areas of business operations. One of such KPIs is the average payment period for production materials, which can notably affect cash flow.
The average payment period for production materials is the difference between when you receive raw materials or products and when you pay the supplier.
Usually, when you pay suppliers is defined by contractual agreements. However, in signing any contract, you must consider that it’s only finished products you can sell to customers.
Hence, you don’t want the APPM to be too short or too long. Too long APPM may be beneficial to you. But your suppliers may not be too happy with it and may fail you unexpectedly as they commit to other partners. Too short, and you may lack cash to deal with emergencies and unanticipated expenses.
11. Customer order cycle time (COCT)
The customer order cycle time measures how fast you deliver products to the buyers from when they create the order. The formula for COCT is:
(Actual delivery date – Order date) / Total Orders Shipped
When you fulfill orders quickly, your customers are happy and may recommend your business. Additionally, tracking COCT is essential in knowing how well you can meet forecasted demands.
For example, say Black Friday is upcoming, and you’re making plans. Your planning would be incomplete and inadequate if you only forecast demand and do not assess if your current logistics system can successfully ship the orders.
12. Gross margin return on investment (GMROI)
Inventory sitting on the shelf or in the warehouse for a long period is a net negative if it's not convertible into cash. Furthermore, it must yield profit for your business. That's what the gross margin return on investment (GMROI) metric seeks to evaluate.
The formula for GMROI is:
Gross profit / average inventory cost
A higher GMROI is better and indicates that the product mix you keep is generating profit.
You should, however, be careful as some exceptionally profitable products may skew the data. So, also check the TEI for each product.
13. Order document accuracy (ODA)
Have you ever had a package that wasn’t yours delivered to your doorstep or received an invoice only to find it contained the wrong details?
Order document inaccuracies can lead to many issues, including losses from delivering to the wrong address, slow supply chain operations, underpayment from incomplete invoices, inventory discrepancies, billing the wrong customer, and more.
The formula for ODA is: (Number of orders with correct documents / Total number of orders) * 100
Some ways to improve this metric are regularly auditing customer information for inaccuracies and using more automation and technology to minimize data entry errors.
14. Backorder (BO)
Despite being out of stock for a product, you may still choose to receive orders for such items based on the belief and knowledge of your supply chain capabilities.
That is the definition of a backorder, like how Apple or Sony will allow you to order the iPhone or PS5, respectively, despite being out of stock. While this may help you secure sales, in theory, it’s a slippery slope if you cannot meet demand.
A good read on your backorder and how long you can fulfill those orders is necessary. A very high backorder with a long turnaround time is detrimental, while a reasonable amount of backorder with a short turnaround is great.
The formula for BO is: (Number of undelivered orders / total orders) * 100
15. Total supply chain cost as a percentage of sales
You want every cent you invest in your supply chain to yield a measurable increase in sales. Tracking the total supply chain cost as a percentage of sales is one of the ways to do this.
Generally, supply chain investment outpacing sales increase is not the best, although there are caveats. That’s why this metric is better assessed over a long period to give time for the investment to yield its intended outcomes.
Knowing this metric can help with scaling decisions. When should I upgrade the supply chain processes and inventory management system? This metric can help. The formula for this metric is:
(total supply chain costs / total sales) * 100
16. Inventory days of supply (IDS)
How long would your inventory last without adding to your current stock? The inventory days of supply (IDS) answers this question. The formula for this metric is:
(avg inventory in a month, in dollars / monthly product demand, in dollars) * 30
Why is this figure important? It’s primarily useful for procurement. It provides insights companies use to decide when to order new stock.
Companies can also run promotions for SKUs with very high IDS to clear them off the shelf sooner.
17. Days sales of inventory (DSI)
The Days sales of inventory (DSI) measures how long it’ll take to convert your average inventory over a period to cash.
The formula for days sales of inventory is:
(the average value of inventory] / (annual cost of goods sold (COGS) / 365)
The ideal DSI falls between 30 and 60 per Shopify, depending on the industry. For example, businesses selling luxury items are likely to have higher DSI than those with regular day-to-day items.
With DSI, lower is better. Low DSI shows that you can quickly turn your inventory into sales.
18. Inventory velocity or turnover
How often do you sell and replenish your inventory during a specific period?
Companies that don’t replenish inventory often may be carrying a lot of dead stock, while companies that replenish too often are at risk of running out of stock and failing to meet customer demands.
The formula for inventory velocity or turnover is:
Inventory turnover rate = cost of goods sold / average inventory value
The sweet spot to strive for is between 2 and 4. Knowing your inventory velocity can help you track when to increase your stock levels, which items to remove from your product mix, and generally minimize holding costs.
19. Inventory-to-sales ratio (ISR)
The inventory-to-sales ratio (ISR) measures your inventory relative to sales. The formula for ISR is:
Average Inventory Value / Net Sales
You want a lower ratio, but a low ISR should always be with the proper context. You can have a lower ISR than another business but run out of stock. So, what’s a healthy ISR?
A healthy ISR is between 0.167 and 0.25, according to Oracle. It’s a right balance that shows you’re not overstocking and committing excess cash and that you’re not understocked and unable to meet demands down the line.
20. Damage-free delivery (DFD)
Internal metrics are vital, but it’s also necessary to track the performance of your logistics partners or the quality of your last-mile delivery.
You must investigate the leading cause if customers consistently report damaged or stolen deliveries. The reasons could be poor packaging, untrained delivery personnel, or a poor product from production.
According to an article in the International Academy Journal of Management, Marketing & Entrepreneurial Studies, businesses lose about 0.5% in gross sales due to shipping damages.
The formula for DFD is:
[(total orders shipped – orders received damaged)/total orders] * 100
21. Storage utilization in the warehouse
We’ve earlier mentioned how businesses have limited resources, including warehouses and storage/distribution facilities. That’s why it is imperative to optimize space usage for maximum effect.
This metric measures how much goods are stored per square foot of storage capacity. The formula is:
(Total square feet of warehouse / square feet occupied by the products) * 100
22. Inventory adjustments made
In supply chain operations, unfortunate things happen, like theft, broken or damaged products, and data entry errors. You must always reconcile your records to get a more accurate representation of your supply chain performance.
Having to constantly amend your inventory records due to theft and other preventable issues points to issues in your supply chain that you must fix immediately.
23. Carrying cost of inventory
Every second a product spends in the warehouse or on your shelf is costly for the business. You’re paying rent, paying salaries, absorbing product losses from theft or damages, and the cost of insuring the products.
You want to minimize carrying costs as a percentage of inventory cost to the barest minimum. According to Zoho, 15% to 30% is a good target for most companies.
Unusually high carrying costs eat into your margins.
24. Freight cost per tonne shipped
Having the right pulse on freight cost can help you tailor your pricing, whether you’re offering free shipping or not.
Tracking it over a long period can also help you identify seasonal trends to help you know when to change shipping costs or negotiate new rates with your providers.
You may also calculate this metric across the different modes, especially if you offer international deliveries.
25. Days sales outstanding
We talked about balancing when you pay suppliers earlier, but the same applies to you. You want to receive all outstanding account receivables as soon as possible. Failure to do so can lead to a cash crunch that can impair your general and supply chain operations.
You want to maintain a low DSO generally. However, it’s also essential to recognize the nature of the businesses you sell to. The formula for DSO is:
(Account receivables / sales) * Days in period
26. Cash-to-cash time cycle
According to the Institute for Supply Management, the cash-to-cash time cycle measures “the days between the purchase of materials/inventory from a supplier and payment collection for sale of the resulting product(s).”
A low cash-to-cash time cycle shows that cash is not tied down in inventory for too long. You always need money to pay for operations, and consistently having long cash-to-cash cycle times may affect your ability to do so.
Long cash-to-cash cycle time may be a symptom of poor marketing, poor product mixes, and suboptimal location.
27. Reasons for return
You should always expect customer returns. You should also document why customers are doing so.
For example, you may need to adjust your size guide if most returns are due to sizing.
You may need to change your last mile provider if goods leave your warehouse in good condition but reach the customer damaged.
Tracking this metric can help you improve your processes and ultimately lead to improved customer satisfaction.
28. Forecast error
Forecast errors can throw all your planning out of the window. Poor forecasting may be due to inaccurate data, unskilled personnel, government regulation, disruptive competitors, etc.
The two things to assess with this metric are the frequency of the errors and the variance between the actual and forecasted figures. Forecasting is not an exact science, so there’s room for error.
That said, the difference should not grossly impact your plans.
You may also like: 5 Tips for Streamlining Data Analysis and Reporting for Actionable Insights
29. Obsolete and excess inventory
Obsolete products are products you can no longer sell. This problem has far-reaching consequences when the volume and total costs of these obsolete products become too high.
You’ll keep incurring higher carrying or holding costs and lower profit margins. That’s why adding this metric to your supply chain KPI dashboard is vital.
30. Supplier quality performance (SQP)
Are you tracking the performance of your suppliers? You should if you aren’t.
To consistently meet customer expectations, suppliers must deliver quality products that meet the highest standards and regulatory requirements.
It’s better to change suppliers than deal with constant customer complaints and order returns. This may require randomly testing some units in each delivered batch.
31. Production or supply attainment
When you estimate customer demand and appropriate a budget for the same, you expect to have the exact number of products over the given period.
However, that is not always the case. You may fail to produce the exact number you need, or your supplier(s) may not fill your orders.
Being unable to meet production goals may increase your backorders and backlog and ultimately affect your ability to satisfy customer demands.
32. Supplier lead time
Supplier lead time measures the difference between when you ordered products and when you received them.
Suppliers with repeatedly poor lead time can impact your ability to meet demand and disrupt your supply chain process.
Constantly monitor your suppliers’ lead time and compare it to previous performance and industry benchmarks.
33. Supplier chain risk index and sustainability
The supply chain is responsible for "90% of an organization's greenhouse gas emissions," according to EY.
Embedding sustainability into your supply chain is no longer a moral choice but one that could impact your positioning in the market.
Additionally, it's imperative to always assess the potential risks and points of failure in your supply chain.
Takeaway: Track vital supply chain metrics for proactive management
Track and measure supply chain performance to help you quickly identify issues and mitigate them.
Such proactiveness guarantees increased customer satisfaction and makes your supply chain resilient to shocks and devoid of vulnerabilities.
One of the easiest ways to be proactive is to create a supply chain metrics dashboard of your most important KPIs. That way, you never miss anything.
With Kippy, you can create triggers and alerts when these KPIs fall or rise above your specified thresholds. Book an interactive demo to see how Kippy can help you seamlessly track your chosen supply chain KPIs!