Effective supply chain management requires coordinating the flows of orders and inventory, balancing the customer’s demand for speed with organizational needs for low cost and efficiency. The supply chain consists of complex relationships between departments, teams, and individuals across areas including procurement, production, transportation, and customer service.
By tracking metrics or key performance indicators (KPIs), supply chain professionals can understand the effectiveness of their entire organization and pinpoint opportunities for improvement. Furthermore, tracking a set of unified metrics improves organizational alignment and enables agility, ultimately leading to greater customer satisfaction.
Here are the 5 key metrics in a supply chain that every company should be tracking and why:
Perfect Order Index
The perfect order index measures the error-free rate of the entire supply chain process. It determines the number of orders that make it through every stage of the supply chain without error and are delivered on time, in the correct quantity and condition, with the correct documentation.
A perfect order index is a composite metric, where perfect orders from every stage are multiplied to give an overall performance indicator. This can be misleading; even if four stages are performing at a 99% error-free rate, when these are multiplied together the entire process will attain only a 96% error–free rate.
However, the perfect order index allows an organization an excellent benchmark to measure the overall performance of the supply chain process, which can be drilled down to analyze the performance at each stages. This way, Issues can be investigated, pinpointed, and corrected to improve the process. The perfect order index can then be assessed over time to measure progress in process improvement.
Cash to Cash Time
The cash-to-cash (or C2C) cycle, also known as cash conversion, measures the time between when a company sends cash to suppliers and when it receives cash from customers. This metric is important because it enables an organization to estimate financing requirements and to determine the amount of money required to fund current operations.
C2C benchmarks vary greatly depending on industry; however, one study showed the best-in-class companies tend to have a cash conversion cycle of less than a month regardless of industry. In contrast, the median C2C measurement varies greatly from one industry to the next: from 75 days for computers and electronics companies to 90 for pharmaceuticals and a cycle of over 100 days for telecommunications enterprises.
The C2C cycle is another compound metric, made up of three supply chain measurements: days of inventory, days of payables, and days of receivables. A shorter cycle means the company is leaner, and that money is spending less time in the hands of others instead of being applied to the core organization’s operations. A study of more than 22,000 publicly-traded companies showed a direct correlation between shorter C2C cycles and greater profitability in 75% of cases.
Supply Chain Cycle Time
Supply chain cycle time is an all-encompassing metric measuring how long it would take to complete a customer’s order if all inventory levels were zero at the time that the order was placed. This metric is the sum of the longest possible lead times for every stage of the supply chain cycle.
This metric is an excellent indicator of the overall efficiency of the supply chain. A shorter cycle means that a supply chain process is flexible, agile and responsive to environmental changes. Tracking supply chain cycle time metrics allows an organization to become more efficient, by identifying existing or potential problems and taking corrective action to shorten the overall cycle time.
The fill rate, also known as the demand satisfaction rate, is the amount of customer demand that is met through stock availability, without backorders or lost sales. Knowing your fill rate is important because it represents the sales that can be recovered, or better serviced if inventory performance is improved.
Access to inventory data is one method of improving fill rate. The better you and your sales team understand available inventory, the better able you will be to ship accurate, complete, and timely orders, improving customer satisfaction along the way.
Research found that improving the relationship between a supplier and a retailer resulted in an 80% improvement in fill rate. At the beginning of the case study, the organization had 4 million undelivered cases, but by making changes to the supplier/retailer interactions they were able to reduce that number by 3.2 million cases. Improvements to the supplier/retailer relationship included accelerating price-change negotiations, improving responses to surges in demand, streamlining order management processes, and changing incentives for the sales force.
In this case, using metrics to pinpoint the areas in which fill rate could be improved, and applying a collaborative method of targeted advancement, resulted in a changed fill rate that could be directly tied to customer satisfaction and retention.
Finally, inventory turnover is one of the most commonly used supply chain metrics. Inventory turnover measures the number of times your entire inventory is sold a specified time period. Inventory turnover is an important metric to measure and track, as it provides an accurate, comprehensive image of the efficiency of the entire supply chain process.
Inventory turnover benchmarks vary greatly from one type of company to the next. For example, CSI noted that in 2016 the average grocery store turned over its entire inventory every 18 days. In contrast, the computer equipment industry had inventory turnover of almost 60 days. A grocery store will have an entirely new inventory 20 times per year, compared to an industry average of 6 times per year for computer equipment.
In general, a low inventory turnover relative to the company’s industry implies that a company has excess inventory due to weak sales. Improving the inventory turnover metric creates strong sales and an agile, efficient supply chain process.
A planned and well-executed system of supply chain metrics gathering and analysis can help to improve an organization’s efficiency, agility, and competitiveness. Supply chain efficiency is tied directly to the bottom line and improves relationships between the organization and its customers and suppliers.
However, gathering the data required and conducting analysis across hundreds of different data points can seem overwhelming. Maintaining objectivity and consistency across the many departments, teams, and individuals involved in the supply chain process represents a different set of challenges as well.
200+ global companies uses Celonis to take measure and take control of their supply chain. Celonis lets you easily track your KPIs, identifies strengths and weakness in your processes, and even proactively gives you advice on ways to improve your supply chain.