Supply chain management priorities are changing. Geopolitical tensions, economic pressures, and the worsening effects of the climate crisis are conspiring to increase the risk of disruption globally. As a result supply chains are restructuring in order to increase resilience while preserving cost containment.
From nearshoring and supplier diversification to automation and digital transformation, all supply chain restructuring starts with visibility. Increasing visibility into the supply chain is key to allowing supply chain managers to identify strengths, and analyse inefficiencies to enable data-supported goals.
Finding the right metrics to measure can be challenging, however. Here are five supply chain metrics that can help quantify supply chain performance.
1. Supply chain cycle time
The supply chain cycle time is a good metric for holistically gauging the overall efficiency of a supply chain. At a glance, a shorter supply chain cycle is more efficient than a longer one. A cycle that averages longer than expected could indicate a bottleneck, external disruption, or inefficiencies to address.
To calculate the supply chain cycle supply chain managers need to accurately measure how long each step of the supply chain takes. By combining time from sourcing suppliers and order placement to customer delivery and final payment, the total supply chain cycle time can be calculated and weighed against expectations.
2. Inventory-to-sales ratio
This KPI measures the amount of inventory available for sale compared to how much is sold and helps avoid over-stocking items, which ties up capital and incurs storage costs. It also prevents understocking items, which prevents delays and back ordering.
Calculating the inventory-sales ratio requires dividing total available inventory by the amount sold and then multiplying that result by 100 for a percentage. In a market where resilience is key, organisations may want to increase their ratio of inventory-to-sales in order to account for unpredictable demand. However, more inventory carries its own cost, so finding the right balance is essential. The right ratio of inventory to sales is always changing based on internal and external factors, so regular reevaluation is key.
3. Inventory accuracy
Transparency in inventory management is critical to ensuring that the decisions being made at a strategic level align with reality. Inventory accuracy measures whether an organisation’s recorded inventory data and actual physical stock align. Enhancing inventory accuracy is crucial as it reduces carrying costs and minimises the likelihood of stock shortages.
To determine inventory accuracy, divide the inventory count in the supply chain database by the physical inventory count. A company looking for a healthy inventory accuracy should strive for an inventory accuracy rate somewhere between 95% and 99%. Improvements in inventory accuracy can be achieved by improving naming and labelling standards. Additionally, the use of advanced warehouse and inventory management systems can reduce manual data entry and decrease the likelihood of human error.
4. Perfect Order Rate
Another useful way to measure the holistic health of a supply chain. A perfect order rate measures a supply chain’s ability to deliver orders to customers error-free. Only orders that are delivered to the customer in full, containing the correct goods, on time, and without any breaches in compliance or contract count as perfect.
A company’s perfect order rate has a significant effect on the bottom line. If a perfect order rate is too low, it can negatively affect customer satisfaction and retention, as well as company reputation. Also, the time, effort, and forfeited revenue spent correcting order errors has a negative ripple effect across the whole supply chain.
In order to be considered a perfect order, a delivery must arrive complete, on-time, undamaged, and with proper documentation. Calculating a company’s perfect order rate requires multiplying (Percent of orders delivered on time) x (Percent of orders complete) x (Percent of orders damage free) x (Percent of orders with accurate documentation) x 100. On average, organisations in the US have a perfect order index of 90%. This figure varies across industries and markets, however.
5. Warehousing costs
The cost of storing physical goods in a physical space is a significant overhead. Picking, organising, and handling those goods compounds this potential pain point. Warehouse operations can represent one of the biggest labour and/or technology costs for a business, and keeping track of these costs is essential.
Costs associated with running a warehouse, such as labour, rent, utilities, equipment, and systems for handling materials and information, not to mention expenses incurred from ordering and storing goods, can significantly vary between facilities. It’s crucial to constantly and accurately measure and evaluate these costs. Successfully doing so can help pinpoint opportunities for reducing costs and improving efficiency.
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