Nowadays, no one could deny that the supply chain is essentially the backbone of any company and most supply chain team use some kind of Supply Chain KPIs. In other words, it is about a living ecosystem that ensures the smooth, effective and consistent delivery of products or services from supplier to customer.
When the supply chain is inefficient, ineffective or fragmented, it may seriously hinder our business prospects and delivering value to the customer. Therefore, monitoring and optimizing relevant supply chain indicators are crucial.
“It’s not the organizations that are competing. It’s the supply chains that are competing.” – Wael Safwat, SCMAO
The effectiveness of a company’s supply chain management can be evaluated and measured as well in different ways. In fact, the measurement criteria a company chooses are often specific to the type of business it is engaged in, so it will include the most crucial aspects of effectiveness for the business. For instance, a company focused on transportation may want to measure its on-time delivery, while a company focused on sales may prefer to measure inventory based on customer service. However, the key performance indicators (KPIs) established by the company illustrate the gap existing between planning and execution in the supply chain, and are indicators used to monitor one or more of the following indicators: cost, value, service and waste.
Key performance indicators (KPI) are a set of quantitative indicators that can help us evaluate business performance over a period of time. Specifically, they allow us to monitor the organization’s efficiency in achieving goals.
Supply Chain KPIs allow us to monitor the processes of the supply chain so that we can identify processes that need improvement.
As Slack, et al. (2016) defines performance measurement as
“the activity of measuring and assessing the various aspects of a process or whole operation’s performance”
Furthermore, Handfield, et al. (2009) and Dilbert suggested:
- Measurement can lead to better performance
- Can result in improved communication throughout the supply chain
- Provides the opportunity for feedback
- It can motivate and direct behaviour towards expected results
What is Supply Chain KPI?
When measuring the effectiveness and cost of the supply chain, we need to set up and monitor KPIs to provide cross-functional activities and visibility into each supply chain component.
Especially in the following areas, KPIs must be used: order processing, inventory management, procurement and supplier management, production/manufacturing, warehousing, transportation, cross-functional, etc.
The use of key performance indicators for performance evaluation ensures a good evaluation of business activities against static benchmarks. For example, if there are immediate fluctuations, or if performance develops in the wrong direction, we can respond quickly.
When the KPI display performance consistently meets or exceeds the required level, we can decide to raise the standard and set a higher standard to achieve. Therefore, KPIs are essential for any business improvement strategy.
“Supply Chain KPIs (Key Performance Indicators) are metrics that can help supply chain professionals monitor the effectiveness and efficiency of various supply chain processes. Supply chain KPIs especially refer to the first few indicators that have an important impact on the overall health of the supply chain. Supply chain KPIs can be used throughout the extended supply chain, or they can be limited to the company’s own supply network.”
To define our supply chain KPIs, it is essential to first set the specific performance parameters required for tracking operations. Essentially, these KPIs act as benchmarks that can help us track the operational indicators of the business and reveal its efficiency in achieving goals. It also allows us to make future predictions based on our progress.
If we intend to make business decisions related to expansion and business development or to improve the company’s order fulfillment, demand forecasting, inventory management, reducing excess and obsolete inventory, transportation, or warehouse management, our KPIs can make tracking easier. Specifically, they will reveal any shortcomings, allowing us to use our strengths to improve supply chain operations.
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How to Choose the Appropriate KPIs?
Supply chain professionals feel overwhelmed by a lot of information and indicators, and many times they feel overwhelmed with the information available on this topic.
The problem with the ease of use of supply chain intelligent tools and the proliferation of dashboards is that there is too much information, but not enough knowledge to help decision-making. Therefore, determining which KPIs are important will depend on various personal and specific factors in our company and business.
However, it is compulsory to:
- Combine some external KPIs with some internal KPIs to balance the worldview. Supply chain key performance indicators need to be aligned with our overall business strategy and goals.
- First, it is important to select only a few KPIs.
- Each KPI should have a clear formula of metric or metric, and it can be compared with historical data (assuming it exists).
Generally, the supply chain indicators that make sense for most companies are forecast accuracy, order cycle time, delivery performance against date, logistics and transportation costs, inventory turnover, supply variance, demand variance, and planned performance.
Main Supply Chain KPI Categories
- Supply Chain Reliability and Responsiveness: Perfect order fulfilment, Order fulfilment cycle time…
Supply chain reliability refers to the degree to which the supply chain produces consistent performance. Improving reliability, reducing inventory and preparing for demand are the top priorities for supply chain professionals.
At the most basic level, a responsive supply chain will be flexible and agile enough to respond to customer needs, while still providing a reliable and efficient model for specific companies. In fact, the needs of a responsive supply chain are similar to those of a value chain model that promotes efficiency.
- Facility related Measures of Performance: Production cost per unit, Quality losses, Product variety…
- Sourcing related Measures of Performance: Days payable outstanding, Average purchase price, Supply lead time…
- Transportation-related Measures of Performance: Average inbound transportation cost, Fraction transported by mode…
- Pricing related Measures of Performance: Profit margin, Incremental fixed cost per order…
What is a SMART KPI?
SMART: Specific, Measurable, Attainable, Relevant, Time Based
The Customizable Supply Chain KPI Dashboard Template I have created for SCMDOJO Community shows you how SMART Goals is developed and utilized. In the below video tutorial I have demonstrated how you can customize this template to change the KPIs as per your business requirement.
18 Key Supply Chain KPIs – Recommended
In any case, choosing the right key performance indicators for supply chain analysis is not an exact science. This process requires the company to clearly define goals and later develop performance indicators that will enable to track progress towards these goals.
Nevertheless, the process of choosing the right KPI cannot be trivial. In order to promote the improvement of the entire company, data not only needs to be accurate but also needs to be useful.
The same perception is true for supply chain management KPIs. Choosing SCM KPI is very important. It can not only provide useful data on cross-functional activities but also track various and diverse supply chain components.
Dos and Don’ts – Supply Chain KPIs
- Don’t selectively choose KPIs and metrics that make you (or your company) look good.
- Don’t be bothered by the many supply chain indicators, which may keep you busy, but may not be useful.
- Do have a set of rigorous supply chain KPIs you monitor on a period basis (daily, weekly, monthly, quarterly etc.). My recommendation is above 18!
- Too high a level of a metric does not provide clarity, but too much in the details will risk missing the big picture. So the idea is the find the right balance!
Conclusion
Having the best and optimal supply chain management will bring fruitful long-term results.
Over time, it will help any type of business development and expansion. Ensuring the smooth operation of complex systems such as supply chain management is a difficult process. It involves multiple organizations, each with its own goals and practices. Tracking shipments and monitoring inventory levels are just a few key aspects that require close attention to ensure effective processing of orders.
As a result, supply chain analysis is essential. Companies can use numerous KPIs and indicators to measure the performance of their supply chain management system and find ways to improve the entire process.
Other useful Supply Chain Best Practices & eBooks from SCMDOJO
References:
Slack, N., Brandon-Jones, A. Johnston, R. (2016) ‘Operations Management’, 8th edition, Harlow: FT/Prentice Hall
Dilbert ‘Performance Measurement at: https://dilbert.com/strip/1996-07-18