Do you feel like you’re blindly navigating your business and struggling to make meaningful adjustments to your supply chain? You’re not alone.

You’re walking a tightrope. You have to maintain a complex ecosystem of inventory levels, distribution and a hundred other processes while improving every inch of your supply chain along the way.

It may feel impossible, but good news! Measuring the right supply chain KPIs can provide the clarity and control you need to level up.

How?

In this article, we’ll examine the top five KPIs and provide expert insights to help you achieve a balance between internal performance and customer satisfaction.

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Article Roadmap

• What Are Supply Chain KPIs?
• Top Five KPIs for Effective Supply Chain Management
• Industry Experts Answer FAQs
• Next Steps

What Are Supply Chain KPIs?

Supply chain management KPIs are quantifiable values that a company uses to measure the success of its operations. How do they track their effectiveness?

Kevin Huffman, the owner of Kriminil Trading, says:

For supply chain targets to deliver effectively, they need to be reviewed based on actual performance so as to have them correctly calibrated into future goals. This is because both business market conditions and expected KPI attainment can and do change in this volatile environment.”

They help benchmark the performance of each supply chain function (inventory management, demand planning and more) to reveal a comparative analysis of rival businesses and areas of improvement.

That said, KPIs are numerous, and businesses generally manage multiple metrics aligned to their end goals. Let’s understand how they work.

Who Uses Supply Chain KPIs?

A range of professionals use KPIs for supply chain management:

1. Businesses: Companies in many industries use KPIs, such as perfect order rate and inventory turnover, to improve customer satisfaction and profitability.
2. Supply Chain Managers: Supply chain supervisors use fill rate and supplier lead time measurements to optimize operations.
3. Logistics Providers: Third-party logistics (3PL) providers improve services by using customer service KPIs tied to logistics metrics.
4. Executives and Decision-Makers: Top-level executives use net promoter score (NPS) and supply chain cost as a percentage of sales to drive strategic decisions and business growth.

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Top Five Supply Chain Management KPIs to Track

There’s no shortage of KPIs to measure success, so it’s easy to get confused. Firms typically focus on three areas of evaluation: customer service and impact, internal performance and quality, and cost.

Based on these criteria, the following emerged above others:

Inventory Turnover

You purchase stock for your business, and the inventory figuratively “turns over” between that day and the day every last item sells out. The inventory turnover ratio is the number of times a company sells and replenishes its inventory over a season or year.

The formula also helps you estimate how many days it will take to sell on-hand inventory. This KPI measures the supply chain’s speed and efficiency in moving products to the consumer. So, a higher ITR indicates a healthy flow of items and cash, while a lower rate indicates demand drops and excess inventory.

Let’s see how to calculate ITR:

Find the average inventory within your chosen timeframe using the formula:

Average inventory = (Beginning inventory+Ending inventory)➗2

If your business lacks seasonal variations, use the ending stock instead of the average inventory. Then, apply the inventory turnover formula:

Inventory Turnover Ratio = Cost of Goods Sold (COGS)➗ Average Inventory

However, this supply chain KPI isn’t without drawbacks. Below, we’ve listed some operational areas that ITR ignores.

1. Seasonal Demand Variation: Inventory turnover rates might neglect seasonal demand swings, leading to inaccurate inventory management estimates.
2. Product Profitability Fluctuations: All products don’t contribute equally to a company’s profits. The inventory turnover rate evaluates everything equally, which may lead to incorrect inventory level decisions for high- versus low-margin items.
3. Holding Expenses: While the inventory turnover rate focuses on sales efficiency, it ignores the costs of retaining extra goods, such as storage, insurance and obsolescence.

Inventory management software helps you factor in seasonal variations and low-margin goods through the following functionalities:

• Demand Forecasting
• Inventory on Hand Report
• Inventory Shrinkage or Variance Report
• Product Performance Report
• Cycle Count

Just-in-time inventory can help you take care of the rest; you can stop paying for obsolete shelf space and other holding costs when demand fluctuates due to inflation, technology failure, changes in policies, high competition, and evolving consumer tastes and preferences.

Perfect Order Rate

This KPI for supply chains stands at the crossroads of internal performance and customer satisfaction.

The perfect order rate is the percentage of orders that are delivered fully, on time, without incident and with proper paperwork. A high perfect order rate shows that the supply chain is running smoothly and customers are getting their orders as promised.

Implementing perfect order measurement can:

• Enhance supply chain visibility
• Reveal areas for improvement
• Boost customer satisfaction and operational efficiency

The variables that’ll help you calculate the KPI are:

On-Time Delivery = [(total orders – orders that don’t arrive on time) / total orders] x 100

In-full delivery = [(total orders – orders that aren’t complete or are incorrect in first shipment) / total orders] x 100

Damage-Free Delivery = [(total orders – orders that arrive damaged) / total orders] x 100

Accurately Documented Order = [(total orders – orders without accurate documentation) / total orders] x 100

Once you have those values, use the formula:

Perfect Order Rate =(Total Number of Orders➗Number of Perfect Orders )×100

On the software side of things, take advantage of the following functions and integrations to manage this KPI:

• Order management to track and manage orders from placement to delivery, ensuring accuracy and timeliness.
• Quality management to ensure products meet quality standards, reducing errors and returns.
• Integration with customer relationship management tools to track customer interactions and feedback to enhance order fulfillment processes and increase the perfect order rate.

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Cash-To-Cash Cycle Time

Cash-to-cash cycle time counts the number of days it takes between paying for raw materials and receiving payment for the products you sell.

A low score for this supply chain KPI suggests higher leanness and profitability. It also confirms your storage and delivery services are in working order because your operational cash is tied up for a shorter period.

It can also help you assess the efficiency and efficacy of your supply chain assets, such as counters, workspaces and vehicles.

Account for the following before calculating the KPI:

Days Inventory Outstanding (DIO): Average number of days it takes for inventory to turn into sales.

DIO = Average Inventory Cost ➗ Cost of Goods Sold per Day

Days Sales Outstanding (DSO): The average number of days it takes to collect payment after a sale is made.

DSO = Accounts Receivable ➗ Total Credit Sales per Day

Days Payables Outstanding (DPO): Average number of days it takes to pay suppliers.

DPO = Accounts Payable ➗ Cost of Goods Sold per Day

Here’s how to calculate the cash-to-cash cycle time:

Cash-To-Cash Cycle Time = DIO + DSO – DPO

Accounting software modules that can help measure this KPI are:

• Accounts receivable management to track client invoices and payments to help calculate days sales outstanding.
• Accounts payable management to handle supplier invoices and payments and calculate days payable outstanding.
• Financial management to integrate with accounting systems and provide data on costs, sales and payments.

Supply Chain Cost as a Percentage of Sales

This measurement determines the ratio of all supply chain costs to sales revenue.

Total supply chain costs include manufacturing, transportation, inventory and warehousing costs.

This supply chain KPI reveals the cost-effectiveness of the supply chain and acts as a baseline for measuring the organization’s overall financial health.

A high proportion could suggest inefficiencies like high inventory holding costs or inefficient shipping. On the flip side, a low proportion shows that the company is effectively managing its expenses, gaining greater profit and market edge.

To improve this KPI, engage associated metrics such as on-time shipment, delivery time, perfect order rate, fill rate and inventory turnover.

Here’s how you can calculate it:

Supply Chain Cost as a Percentage of Sales=(Total Sales➗Total Supply Chain Cost)×100%

Net Promoter Score (NPS)

NPS measures client loyalty and satisfaction with a single question: “On a scale of 0 to 10, how likely are you to recommend our company/product/service to a friend or colleague?”

Customer replies fall into three categories: Promoters (9-10), Passives (7-8) and Detractors (0-6). Determine the score by subtracting the percentage of Detractors from the percentage of Promoters.

Calculate this KPI for supply chain processes as follows:

NPS= Percentage of Promoters−Percentage of Detractors

The score ranges from -100 (if all respondents are detractors) to +100 (if all respondents are promoters).

Some benefits of incorporating this KPI for your supply chain department are:

• Customer Satisfaction and Loyalty: NPS gauges satisfaction and loyalty toward products, delivery, service, and overall fulfillment, which is crucial for long-term customer retention.
• Feedback for Improvement: NPS provides direct feedback on areas needing improvement, such as delivery times, product handling and reverse logistics.
• Benchmarking Performance: Compare your performance against competitors and industry standards to set realistic improvement objectives and measure progress.
• Enhancing Supply Chain Resilience: A strong NPS reflects a resilient supply chain that can adapt to challenges without compromising customer satisfaction, agility and responsiveness.

CRM integrations, survey tools and reporting dashboards are all software inclusions that can help you measure KPIs.

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Industry Experts Answer FAQs

Individual research and statistics can only get us so far. Hearing all about supply chain KPIs from people who work with them daily goes the extra mile to cement trust. That’s what this section is about.

We’ve gathered insights from an array of industry experts with designations like COO, President, University Professor and Marketing Head to give us exclusive tips and inside information!

Let’s jump in.

Robert Khachatryan, CEO of Freight Right Global Logistics, uses Walmart as an example to illustrate the implications of inventory management:

Effective KPIs, such as Inventory Turnover and Order Accuracy, directly impact inventory management by highlighting areas for improvement, leading to reduced holding costs and increased fulfillment rates. Walmart suppliers face a fine of 3% of the goods’ cost for each item that doesn’t meet the retailer’s “on-time, in full” requirement.

Typically, carrying costs represent 20-30% of the total inventory cost, although this can vary depending on your industry and business size.”

Matt Little, the owner of Festoon, is here to guide us:

One of the best ways to do this is to identify which KPIs matter most to your business goals. Once you’ve got that sorted, you want to make sure your targets are SMART: Specific, Measurable, Achievable, Relevant, and Time-bound.

Take lead time, for example. Instead of just saying, ‘Let’s reduce lead times,’ you might set a target like, ‘Decrease lead time from the supplier by 15% within the next six months.’ This way, you have a clear goal to work towards, and you can measure your progress along the way.”

Dr. Tom Goldsby, Chair of Logistics at Haslam College of Business at the University of Tennessee, emphasizes the importance of regular communication with supply chain stakeholders:

Customers expect regular, usually monthly, scorecards. These will support quarterly business reviews.

It is also important to report KPIs internally within the organization and to tie internal performance metrics to the driving metrics found on the KPI. In this way, regardless of where one sits in the organization, you can relate your performance to several critical KPIs.

Increasingly, we are going beyond the conventional confines of volume, quality, delivery performance, and cost to include dimensions like sustainability performance. These metrics can be important for the sake of observing regulations and meeting the expectations of stakeholders, like current and prospective customers, as well as the general public.”

Brett Berger, Co-founder & COO of Flow Sparrow, adds to the importance of including key stakeholders:

To encourage cross-functional collaboration, include key stakeholders from finance, operations, logistics, and procurement, while setting goals. Teams can make sure that goals are in line with organizational goals and strategic priorities are in line with those goals.

Once goals are set, it’s important to set a normal schedule for reporting. It is very important to give stakeholders full reports showing key data, performance trends, and useful insights regularly, whether it’s once a week, once a month, or once every three months. Everyone is more interested and understands things better when reports are made to fit the wants and needs of different stakeholder groups.

Root cause research is a key part of fixing these problems. Teams can find the source of problems like disruptions, inefficiencies, or bottlenecks by looking into the core factors that cause performance differences or deviations from goals.”

Dan Dillon, the Founder and Chairman of CleanItSupply.com guides us:

The best way to communicate these is through visually engaging dashboards that lay out data clearly, helping all stakeholders understand and act.

In terms of tracking and analyzing supply chain KPIs, periodic review sessions coupled with real-time trackable dashboards work best.

They permit immediate corrective actions and empower decision making.”

Peter Hoopis, President of Hoopis Pickleball, told us:

Measure how long it takes to turn inventory into cash to know how well you manage your working capital. A shorter cycle time shows that you’re efficiently selling your products and getting money back quickly, which is good for your financial health. If the cycle time is long, it could mean you have issues with inventory management, production delays, or collecting payments.

For instance, in our eCommerce business, we noticed that it takes us an average of 45 days to convert inventory into cash. Upon closer analysis, we identified that by renegotiating payment terms with suppliers and optimizing our inventory management software, we could reduce this cycle time to 30 days.

This improvement would significantly enhance our working capital efficiency and allow us to allocate more resources to marketing campaigns. It would also help us cut costs, expand our product range, and improve our overall financial performance.”

Mike Falahee, owner of Marygrove Awnings, emphasizes regular and thorough data analysis for analyzing supply chain KPIs:

One key practice I follow for analyzing supply chain KPIs is regular and thorough data analysis. By consistently monitoring metrics such as inventory turnover, on-time delivery, and supplier performance, I can identify trends and areas for improvement.

For example, by analyzing supplier performance data, we identified a supplier with consistently late deliveries. We addressed this by renegotiating terms and establishing backup suppliers, improving our on-time delivery KPI. Regular data analysis has been crucial in maintaining a streamlined and efficient supply chain, ultimately enhancing our customer experience.”

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Next Steps

Mastering your supply chain requires targeted insights, strategic implementation, and frequent audits. We discovered how the top five supply chain KPIs can provide vital data to improve your operations and gathered advice from industry professionals to help expedite the process — every move you take now counts.

Take the plunge, delve into the data, track these KPIs and turn insight into action.

Still hesitant? Explore our free comparison report to get a side-by-side view of specific SCM products with modules that help track KPIs.

Which supply chain KPIs have you worked with? Tell us in the comments!

SME Contributors

1. Kevin Huffman is a highly seasoned operations expert and the owner of Kriminil Trading, a platform where he shares insights from his favorite finance and market-related books. He also provides in-depth analysis and explanations of market activities, trends, phenomena, and terms.
2. Robert Khachatryan is the CEO and founder of Freight Right Global Logistics. He is an expert in supply chain design, eCommerce shipping, freight marketplaces, and booking automation. With a background in rates and supply chain dynamics, he offers insights into current industry trends and challenges.
3. Matt Little owns Festoon and has over seven years of experience in supply chain management. Their extensive product range includes customizable LED lights, and they proudly hold a leading position in the Australian market. Their offerings stand out due to their exceptional price-to-quality ratio, catering to various sectors, including construction, events, landscape lighting and commercial venues.
4. Thomas J. Goldsby is the Chair in Logistics at the University of Tennessee, Knoxville’s Haslam College of Business. He is also the co-executive director of the Global Supply Chain Institute.

   He holds a bachelor’s in business administration from the University of Evansville, an MBA from the University of Kentucky and a doctorate in marketing and logistics from Michigan State University.

   Goldsby has supervised more than 100 Lean/Six Sigma supply chain projects with industry partners, chaired eight doctoral dissertations and served as an investigator on multiple federally funded research projects exceeding $3.5 million in grant proceeds.

5. Brett Berger is the co-founder and COO of Flow Sparrow, an innovative brand that specializes in creating cutting-edge productivity tools and software solutions to enhance workflow efficiency and personal organization. With a focus on intuitive design and seamless integration, Flow Sparrow is committed to empowering individuals and teams to achieve their goals with greater ease and effectiveness.
6. Danny Dillon is the Chief Executive Officer (CEO), Chairman, and Founder of CleanItSupply.com. His corporate journey started in 1997 when he opened DillonChem.com, an online store that provided professional-grade cleaning supplies, such as floor finishes, floor strippers and different industrial cleaning agents, to janitorial companies. His initial ventures in the field of digital commerce laid the foundation for his later triumphs in eCommerce.
7. Peter Hoopis is the President of Hoopis Pickleball, an eCommerce retail platform for pickleball enthusiasts. For over 15 years, Peter H. Hoopis and the Hoopis Group have been dedicated to recruiting, growing and developing financial advisors. With family roots in financial services going back over 50 years, the name Hoopis has become the industry standard for high-performing teams.
8. Mike Falahee is the owner of Marygrove Awnings, a custom awning company that has been serving residential and commercial customers for the past 85+ years. Their mission is to provide every customer with a 5-star experience. With more than forty years of entrepreneurial experience, he has mastered the art of managing daily operations with ease, all the while nurturing a thriving organizational culture.