SUPPLY CHAIN MANAGEMENT | 6 minute read
Guest post by Excelsior Integrated
Today's world moves at the speed of light and to stay relevant we need to make quick decisions. To achieve this, we require actionable, easy to interpret and smart key performance indicators that assist our decision-making process.
So if you're all about that supply chain, we have the most crucial KPIs to focus on that'll make processes such as inventory management, inventory tracking, kitting and assembly a lot more seamless.
This KPI measures the error-free percentage of all stages of a purchase order using the formula
We usually do the calculation stage by stage:
Other stages of a purchase order such as invoicing error, procurement forecast error, and shipping error also undergo calculation.
The cash-to-cash or payment cycle time calculates the time length operational capital is held up. It is the time frame from when you pay for materials to receiving payment for the product. In this period cash is not present for use. Quick cash to cash cycle shows a profitable supply chain.
You can average this calculation for all orders in a week, month, quarter, etc. With many materials, you calculate the weighted average of the materials' payment date.
This KPI measures how long it takes to fulfill a customer order after they make a purchase
This is the percentage of your customer's order fill rate for the first shipment. You can represent this as a percentage of SKUs, order value or items tagged with the shipment.
Fill rate is vital for customer satisfaction and transportation efficiency.
Days of Supply is the most frequently used KPI in measuring a supply chain's efficiency and you'd want to focus on this one. Because DOS helps to provide you with a clear understanding of which level you need to keep your stock, to improve inventory management every month.
To calculate this KPI, you need to divide the average inventory present by your average monthly demand and then multiply it by 30 if you're calculating for a month.
Using this metric, you can calculate the number of days it would take your supply to run out if not replenished. This KPI aims to ensure that we minimize inventory days of supply to decrease the possibility of an obsolete inventory.
You can also avoid excess inventory that ties up operational cash flow with the minimization of this KPI.
The supply chain cycle time is the time frame for filing a customer order at zero inventory level. This KPI reveals the total efficiency of a supply chain. Long cycles show a tedious and non-agile supply chain. By analyzing this metric, you can locate competitive advantages or pain points.
The inventory velocity (IV) is the rate of inventory you're projecting that you’ll consume within the next cycle. It assists your managers in understanding how your present inventory meets demand.
To measure this KPI you need to divide your opening stock by your sales forecast for the next cycle. Measuring inventory velocity monthly will give clues on how to align your inventory level to an optimal level capable of handling supply-demand, which will prevent excessive stock warehousing.
For ongoing SKUs, an IV ranging 60-70% offers a positive match of demand; however, an IV range of 75 to 80% is more helpful for fast-paced SKUs. Keep in mind that while an inventory velocity lower than 60% reveals excessive stocking, an IV over 80% reveals the risk of getting out of stock.
With this KPI, you can measure the number of times you sell warehouse inventory. It calculates the number of opportunities you have to gain profit yearly from your capital invested in the inventory. You measure this metric by dividing the cost of goods (COGs) sold by your average inventory investment.
For acceptable benchmarks, a high inventory turnover reveals an efficient supply chain. However, what’s defined as a high ITR varies from sector to sector.
Knowing the right ITR depends on the gross margin generated by the brand or SKU.
The gross margin return on investment reveals the gross profit gotten for every dollar of the average inventory investment. You measure it by dividing your gross profit by average investment in inventory.
Calculating GMROI monthly offers you the chance to gain a clear understanding of which brand or SKU produces more inventory gross profit.
Conclusion
Every KPI in this piece is vital for an efficient decision-making process, especially days of supply as it reveals what your stock level should be. Measuring that metric alone will save you tons in terms of cost.
Use these KPIs to your advantage and watch your supply processes move with superfluidity.
Chris is an advisor at Excelsior Integrated, a 3PL Fulfillment company serving high growth eCommerce clients from warehouse locations in Massachusetts and California. Chris has been with Excelsior for 7 years, through an exciting period of evolution. He now lives in New York City.
