If you think of the supply chain as the circulatory system of your business, it’s critical for it to flow unimpeded and deliver what you need, where you need, as quickly as possible. Aligning your procurement, production, transportation, and customer service departments can be just as complex as coordinating the body’s many dependent organs.
So how can you pinpoint opportunities for improvement, and balance customer demands with your needs for lower costs and higher efficiency? Metrics or key performance indicators (KPIs) are the obvious solution, but there’s more to it. Monitoring a set of unified metrics improves your organizational alignment and enables agility, ultimately leading to greater customer satisfaction.
These are the five key metrics you should track to optimize your supply chain operation:
1. Perfect Order Index
The perfect order index measures the error-free rate of the entire supply chain process. It’s a composite metric; perfect orders from every stage are multiplied to give an overall performance indicator. This can be misleading. Even if four stages are performing at 99%, when multiplied together the entire process will attain only a 96% error-free rate.
Still, the perfect order index is an excellent benchmark for overall supply chain performance. And when you drill down you can investigate, pinpoint and correct issues. The index can then be assessed over time to measure process improvement progress.
2. Cash-to-Cash Time
The cash-to-cash (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. The C2C cycle is another compound metric, made up of three supply chain measurements: days of inventory, days of payables, and days of receivables.
C2C benchmarks vary greatly; however, one study showed the best-in-class companies tend to have a cash conversion cycle of less than a month regardless of industry. With a shorter cycle, money is spending less time in the hands of others instead of being applied to your core 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.
3. 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 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 your supply chain. A shorter cycle means the process is flexible, agile and responsive to environmental changes. Tracking supply chain cycle time identifies existing or potential problems, so your business can take corrective action.
How efficient is your supply chain? Supply Chain Cycle Time gives you valuable insights.
4. Fill Rate
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 you can recover or service better if you improve inventory performance.
One method for improvement is access to inventory data. The better you and your sales team understand available inventory, the better able you are 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. Changes included accelerating price-change negotiations, improving responses to surges in demand, streamlining order management processes, and changing incentives for the sales force.
5. Inventory Turnover
Inventory turnover measures the number of times your entire inventory is sold in a specified time period. It’s an important metric 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. A grocery store might 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 process.
The supply chain carries the lifeblood of your company. Just as doctors can measure your body’s circulatory efficiency and remove blockages, tracking the supply chain metrics that will have the most impact on your business and making improvements will lead to a sound and successful future.
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