In today’s business landscape, a company’s supply chain is its undeniable backbone. Most supply chain teams rely on various Supply Chain KPIs. The supply chain represents a dynamic ecosystem that ensures the seamless, efficient, and reliable 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 the delivery of value to the customer. Therefore, it is crucial to monitor and optimize relevant supply chain indicators.
“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 also be evaluated and measured in different ways. Companies select specific measurement criteria based on their business type—transportation may emphasize on-time delivery, and sales may focus on inventory related to customer service. Key performance indicators (KPIs) bridge the gap between planning and execution in the supply chain, monitoring cost, value, service, and waste.
Key performance indicators (KPIs) are a set of quantitative indicators that can help us evaluate business performance over some time. Specifically, it allows 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.
Slack et al. (2016) define 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.
- This can result in improved communication throughout the supply chain
- Provides the opportunity for feedback
- It can motivate and direct behavior toward expected results
Download Free Supply Chain KPIs Cheat Sheet in PDF
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.
EKPIs must be used, especially in the following areas: 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 assessment 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.
“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 primarily encompass the initial indicators significantly influencing the overall well-being of the supply chain. These indicators may span the extended supply chain or be confined to the company’s internal supply network.”
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 necessary will depend on various personal and specific factors in our company and business.
Suppose 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. In that case, our KPIs can make tracking easier. Specifically, they will reveal any shortcomings, allowing us to use our strengths to improve supply chain operations.
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 essential to select only a few KPIs.
- Each KPI should have a precise 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 fulfillment, Order fulfillment 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 of 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…
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.
To define our supply chain KPIs, it is essential first to 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.
Learn about Basic Supply Chains, Value Chains, Business Strategies & Concepts, and Supply Chain Evolution with Paul Denneman.
What is a SMART KPI?
SMART: Specific, Measurable, Attainable, Relevant, Time-Based
The Customizable Supply Chain KPI Dashboard Template I have created for the SCMDOJO Community shows you how SMART Goals are developed and utilized. In the video tutorial below, I demonstrated how you can customize this template to change the KPIs per your business requirements.
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 define goals clearly and develop performance indicators that will enable it to track progress toward these goals.
Nevertheless, the process of choosing the proper KPI cannot be trivial. In order to promote the improvement of the entire company, data not only needs to be accurate but also helpful.
The same perception is accurate for supply chain management KPIs. Choosing SCM KPI is very important. It can not only provide valuable 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 helpful.
- 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 to 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 business development and expansion. Ensuring the smooth operation of complex systems, such as supply chain management, is a complicated 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 the 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.
Frequently Asked Questions (FAQ)
What is the best KPI in logistics?
Determining the single best Key Performance Indicator (KPI) in logistics can be subjective and dependent on specific business goals and objectives. However, one widely regarded and crucial KPI is “On-Time Delivery.” This metric assesses the ability of a logistics system to meet delivery deadlines consistently. On-time delivery not only reflects operational efficiency but also directly impacts customer satisfaction and overall supply chain performance. Timely deliveries contribute to customer loyalty, reduced inventory holding costs, and improved relationships with suppliers, making it a pivotal KPI for evaluating logistics success.
What is the KPI in supply chain management?
In supply chain management, KPIs are quantifiable metrics used to measure the efficiency and effectiveness of various processes within the supply chain. These indicators provide valuable insights into the performance of critical activities such as inventory management, order fulfillment, and logistics. KPIs help organizations track key aspects like delivery times, inventory turnover, and supplier performance, allowing them to identify areas for improvement, make informed decisions, and optimize overall supply chain performance.
What are the four key performance indicators?
The four key performance indicators (KPIs) in supply chain management typically include inventory turnover, on-time delivery, order fulfillment cycle time, and supplier lead time, providing crucial metrics to assess and optimize the efficiency of the supply chain processes.
What is a smart KPI?
A SMART KPI is a performance metric that is Specific, Measurable, Achievable, Relevant, and Time-bound, providing a clear and structured framework for setting and evaluating goals within an organization.
Other useful Supply Chain Best Practices & eBooks from SCMDOJO
The Ultimate Guide to Inventory Planning Methods
The Complete Guide to Plan-For-Every-Part (PFEP)
References:
Slack, N., Brandon-Jones, A. Johnston, R. (2016) ‘Operations Management’, 8th edition, Harlow: FT/Prentice Hall
Dilbert’s Performance Measurement at: https://dilbert.com/strip/1996-07-18
About the Author- Dr Muddassir Ahmed
Dr MuddassirAhmed is the Founder & CEO of SCMDOJO. He is a global speaker, vlogger, and supply chain industry expert with 17 years of experience in the Manufacturing Industry in the UK, Europe, the Middle East, and South East Asia in various Supply Chain leadership roles. Dr. Mudassir has received a PhD in Management Science from Lancaster University Management School. Muddas it is a Six Sigma black belt and founded the leading supply chain platform SCMDOJO to enable supply chain professionals and teams to thrive by providing best-in-class knowledge content, tools, and access to experts.
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