Key Metrics for Supply Chain Management
We all know data drives optimization, and optimization drives successful supply chains. But what are the key metrics you should be tracking when assessing and analyzing the successful implementation of your supply chain strategy? Do you know? Don’t worry, this is section for you.
Supply chains are the circulatory systems of your business – it’s important to keep it free of blockages otherwise, a business can take a hit.
So how can you identify blockages and ensure a good, steady flow of goods across your supply chain? Metrics and Key Performance Indicators of course. These are the five key metrics you should be tracking to optimize your supply chain operation:
1. Perfect Order Measurement
Perfect order measurement (or POM) is the percentage of orders that are error-free. This measures the error-free rate of your supply chain process.
A simple calculation is ((total orders – error orders)/total orders) * 100.
Generally these calculations are broken down by stage, and then multiplied to give an overall composite of the performance of your supply chain.
For example, you would calculate perfect orders from procurement, production, transportation, and warehousing, and then multiply those numbers to get a composite POM.
2. Cash to Cash Cycle Time
Cash to Cash Cycle Time is the number of days between paying for materials, and getting paid for products.
A simple calculation is materials payment date – customer order payment date.
Cash to Cash measures the amount of time operating capital is tied up, during which time the cash is not available for other purposes. A fast cash to cash cycle time means your supply chain is lean and profitable.
3. Supply Chain Cycle Time
Supply Chain Cycle Time is a measurement of how long it would take to complete an order if all inventory levels were at zero at the time the order was placed.
This metric is an indicator of the efficiency of your supply chain. A shorter supply chain cycle time means your supply chain is flexible, agile and responsive to outside changes. Tracking this metric helps your business identify problems and take corrective action.
You can calculate Supply Chain Cycle Time by taking the sum of the longest lead times for each stage of the cycle.
4. Fill Rate
Fill Rate, also known as demand satisfaction rate, represents the amount of custumer demand met through available stock, without backorders or lost sales. Fill Rate is important because it helps understand the sales you can recover if you improve inventory performance.
The better supply chain managers understand available inventory, the better businesses are able to ship accurate, complete and timely orders. This is crucial to maintaining customer satisfaction and repeat customers.
Fill rate can be calculated as (1 – ((total items – shipped items) / total items)) * 100.
5. Inventory Turnover
Inventory turnover measures the number of times your entire inventory is sold through a specific time period. Inventory turnover gives you a comprehensive picture of the efficiency of your supply chain process.
Generally, a low inventory turnover means that the business has weak sales and excess inventory. Improving inventory turnover drives stronger sales and implies a more agile, efficient process. As a rule of thumb, a high inventory turnover indicates an efficient supply chain.
Inventory turnover can be calculated as cost of goods sold / average inventory.