Thursday, February 22, 2024
Thursday, February 22, 2024
HomeProcurement/Supply Chain ManagementMost Important KPIs for Supply Chain Management

Most Important KPIs for Supply Chain Management

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An effective and efficient supply chain is the backbone of any business. Key Performance Indicators (KPIs) can assist in defining and creating high performance in supply chain. If you know the KPI for supply chain, then you can make better strategies to run the supply chains for increasing profits and providing value to the customers. The top KPIs for supply chain management are discussed in this article.

Key Performance Indicators (KPIs) for the Supply Chain

Perfect Order Rate

The perfect order rate is percentage of orders that are delivered in full, on time, without any issue, and with the documentation which are complete and accurate.

Perfect order is the most essential KPI of the supply chain because it directly impacts customer satisfaction. There are many components of perfect order KPI.

  1. On time delivery
  2. In full delivery
  3. Damage free delivery
  4. Accurate documentation

A low percentage of on-time-delivery indicates that the customers are not getting their orders on time. This may result in additional costs incurred like giving refunds and offering returns to customers along with customer dissatisfaction.

Perfect Order Rate = ((Total number of orders- total number of error orders)/Total number of orders) *100

Customer Order Cycle Time

Customer order cycle time is the time between customer placing an order and receiving the order. It is made up of following components:

  1. Customer order
  2. Customer entry
  3. Manufacturing order
  4. Warehouse packaging
  5. Delivery

Customer order cycle time is compared with cash-to cash cycle time to diagnose any issues. If the cash-to-cash cycle time is increasing but the customer order cycle time is not increasing, then other areas like supplier lead times, invoicing times, account payable and receivable are investigated.

Fill Rate

Fill rate is used to monitor order fill and line fill rates. It represents the percentage of orders that are successfully completed with the first shipment. In other words, fill rate may also be defined as the percentage of orders that do not require a second, third, or forth shipment and so on.

Order Fill: It measures the percentage of orders successfully completed on the first shipment.

Line Fill: It measures the percentage of order lines successfully delivered on the first shipment.

Unit fill: It measures the percentage of items successfully delivered on the first shipment.

The fill rate of supply chain is calculated as follows:

((Total Number of Items – Number of Shipped Items) / Total Number of Items) * 100

Fill rate indicates the customer satisfaction and the efficiency of delivery service of a supply chain.

Inventory Days of Supply

This KPI indicates number of days your inventory would last without replenishment. It is also known as Days in Inventory, the Inventory Period, or Days Inventory Outstanding. Generally speaking, it is the average time between purchasing any item and selling it to the customer. In case of a manufacturer, it is the average time between the purchase of raw material and sale of the finished product to a distributor.

A small ‘Inventory Days of Supply’ means a good indicator for supply management function. If the inventory is selling in a shorter period, it means that your company is making profits faster and the cost of handling inventory as well as risk of inventory becoming obsolete is less.

Method of Calculating ‘Inventory Days of Supply’

Suppose total number of bags in stock= 500

Average sales in a month= 120

Average daily sale= 120/30= 4

Inventory Days of Supply= 500/4= 125

The estimation of Inventory Days of Supply should be accurate for a good business. If the estimation is higher the actual, then ‘out of stock’ situation will arise because the inventory will arrive later then entire items are sold. If the estimations are at the lower side, then it could lead to unnecessary accumulation of inventory resulting in more inventory handling cost and other related issues as discussed above. Taking into account of this KPI is therefore very important and it should not be ignored.

On Time Delivery

On time delivery is one of the most important KPIs of the supply chain. It is generally measured as a percentage of orders delivered on or before the date, they are promised. If a company is capable of delivering the products fast, then the consumers and commercial customers are satisfied and they are retained. If the delivery is slow, then they will go somewhere else.

Supply Chain Costs as a Percentage of Sales

It is the most common KPI used by the organizations to measure the efficiency of a supply chain. ‘Supply Chain Costs as a Percentage of Sales’ is the total amount of money you spend on supply chain costs as a percentage of your total sales for the same period.

There are many factors that add costs to the supply chain. If you have to deliver some item quickly then the procurement of raw material has to be fast. In that case, the supplier may take advantage of the situation and may increase the cost of raw material. In addition to this there may be many other costs that add to maintain the supply chain.

The organizations should try to keep the costs of supply chain low so that the profitability of the organization may increase.

Summary

The evaluation of supply chains is crucial for sustaining any business. If the supply chain will be robust and efficient then it will add value to the customer and the customer satisfaction level will be enhanced. A good supply chain also increases profitability of the organization. The KPI discussed above indicate the health of supply chain of an organizations. The management should evaluate their supply chains on the basis of these KPIS and should take appropriate strategic as well as tactical decisions to enhance the performance of their supply chains.

References:

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Rajesh Pant
Rajesh Panthttps://managemententhusiast.com
My name is Rajesh Pant. I am M. Tech. (Civil Engineering) and M. B. A. (Infrastructure Management). I have gained knowledge of contract management, procurement & project management while I handled various infrastructure projects as Executive Engineer/ Procurement & Contract Management Expert in Govt. Sector. I also have exposure of handling projects financed by multi-lateral organizations like the World Bank Projects. During my MBA studies I developed interest in management concepts.
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