The Chief Supply Chain Officer is tasked with predicting demand and adjusting allocations in every channel, as well as integrating warehouse and transport processes for optimal delivery to the organization's customers. But are the CSCO's pain points being adequately addressed?
Supply chains play an important role in business operations and represent a cost that companies try to manage to make their products competitive, if not affordable.
So how do you know if your supply chain operations are going as planned?
Simply explained, supply chain metrics are concrete numbers that an organization regularly watches to measure how it contributes to the overall business goal. Having a grip of these metrics and KPIs enable the organization to assess how its supply chain is performing.
An organization may do well to track more than 20 supply chain metrics to measure performance and management.
At the supply chain management level, key metrics and KPIs include cash-to-cash cycle time (the period between when a company pays suppliers for materials and when customers pay for the final finished product). This cycle time needs to be as short as possible, with most companies aiming to achieve cash-to-cycle time to less than a month. If it exceeds the one-month period, it is time to spot potential causes of cash flow issues.
Another important metric is customer order cycle time or the number of days between the company receiving a purchase order and completing customer delivery. This measures the responsiveness of the supply chain and how you provide customer service.
Supply chain cycle time, on the other hand, measures how long it would take to complete an order if inventory levels were zero. This provides an overview of the efficiency of the entire supply chain.
Meanwhile, it is important to track service rate or the percentage of product orders that are delivered on time and perfect order delivery rate or the percentage of orders that are error-free from beginning to end.
In terms of delivery, the key metrics are on-time delivery or the percentage of orders that arrive on schedule; in-full delivery or the percentage of sales orders that are delivered completely in the first shipment; damage-free delivery or the percentage of orders that are delivered without any damage; accurately documented order or the percentage of orders in which all documents relating to the order are accurate.
On the financial side, an organization would do well to track gross margin return on investment (GMROI) which measures how much money a company makes on a specific inventory investment. Other metrics in this area are total supply chain management cost which measures the total cost of the supply chain operations compared with overall sales and supply chain cost per unit sold which measures supply chain costs compared with how many of a given item the company sells.
Day sales outstanding represents how quickly a company collects revenue from customers. A low day sales outstanding number means the company generates revenue faster in support of the overall cash flow.
In terms of inventory, key metrics and KPIs include inventory days of supply (IDS) which represents the number of days it takes a company to run out of inventory if it didn’t add to supply. This helps the company understand and maintain its par level.
Days sales of inventory (DSI) measures how long it takes a business to sell the items it makes or buys while inventory-to-sales ratio compares the inventory the company carries to overall sales. It measures the financial stability of a company as it is closely related to inventory turnover ratio, which measures how often a company’s entire inventory is sold in a specific period. In general, a lower inventory turnover ratio means a company may have excess inventory due to lagging sales.
The turn-earn index combines inventory turnover and gross margin to assess a company’s profits and use of inventory. Most companies aim for a turn-earn index of at least 150. Meanwhile, inventory velocity refers to the percentage of inventory that the company projects it will exhaust within the next specified period. This helps the company set optimum inventory levels. Ideally, an inventory velocity of 60 percent to 70 percent is a solid benchmark, with up to 80 percent for fast-moving inventory items.
Meanwhile, months on hand indicates how many months of inventory the company has at its disposal. Stock rotations refers to the number of days, it takes for the organization to run out of inventory stock.
In terms of shipping and freight, key metrics and KPIs include fill rate or the percentage of customers’ orders that are filled on first shipment. This is a measure of the company’s supply chain efficiency.
Freight bill accuracy measures the precision of orders and shipping bills, while freight cost per unit measures how economically one ships products. It measures total freight costs divided by how many units are being shipped. On-time shipping rate refers to the percentage of times a customer receives a product within the promised shipping window.
Other supply chain metrics and KPIs include average payment period for production materials, supplier on-time delivery, return reason, order to cash, among others.
Identifying, remembering and tracking these supply chain metrics and KPIs seems to be an improbable task. Fortunately, cloud technology solutions are now available to enable companies and organizations to track these metrics with efficiency.
A good cloud infrastructure empowers AI-driven supply chain management that not only tracks, but also presents the key metrics and KPIs in an easy-to-understand and customizable central KPI dashboard. Members of the organization can access the dashboard and decide which KPIs deserve focus and priority.