According to the Oxford Dictionary, a KPI or Key Performance Indicator is a quantifiable measure used to evaluate the success of an organisation, employee, etc., in meeting the objectives for performance. Essentially, a KPI measures the effectiveness of a particular campaign or strategy that a company has adopted. It measures how the employees within the organisation have adapted to change or to what extent have they understood new concepts, and so on.
However, with a plethora of KPI indicators available, companies and organisations need to determine which works best for them. Among several available signs, you have to decide which reflects your company’s performance the best, and in the most accurate way possible. When it comes to measuring the efficiency of a supply chain, the case is no different. Here are a few indicators that are considered the best to ascertain how good the functioning of your supply chain actually is.
1. Inventory Turnover Ratio
This indicator measures the efficiency of your supply chain. It is a great way to provide insights into the buying practices of the company and how efficiently orders are being carried out. It measures how fast your inventory is moving, along with measuring costs. This is a good solution since it takes into account factors such as cost and time, that ensure efficient results that are unbiased or ignorant of any one factor.
Fleet tracking such as this is essential since it helps decide what can be changed in the buying process in the supply chain and can also help gauge demand in a better way. The higher the inventory turnover, the better it is for your business.
The formula for an inventory turnover ratio is the cost of sold goods divided by the average inventory for the same period.
2. Order Management
This KPI is again a significant one, which is also a commonly used system by most logistics-based companies. It measures the units of orders and trends of processing the same. This also takes into account aspects like customer refunds and returns, etc. This is a comprehensive system that tracks orders right from the time they come in, till they are delivered, and sometimes even beyond that.
This is a comparatively massive scale of measuring efficiency, but effective nonetheless. The issue with an order management KPI is that sometimes people tend to take into consideration a lot of additional factors and verticals. Sometimes they do just the opposite and do not incorporate enough elements that will help them achieve the right results. Hence, while drafting this measure, ensure that you include and exclude elements as per how crucial they are or aren’t.
The formula for order management KPI is = (Total Number of Orders Shipped by the Designated Time / Total Number of Orders Shipped) * 100
3. Cash-To-Cash Cycle Time
This indicator measures all the important factors and combines three ratios to give you an accurate measure. These three include days of inventory (DOI), days of payables (DOP), and days of receivables (DOR). These will help you determine the time period you need to convert resources and capital into cash flows, thus ensuring a round-up of the whole process of the order.
An indicator such as this is extremely important when it comes to planning the supply chain or ensuring it runs efficiently. It also helps eliminate any mistakes in the whole process by rectifying them. Another name for this method is the ‘cash conversion cycle’ since it is a representation of how many days of expenses a business should support. In this metric, the shorter the business cycle, the better it is for the company’s operations.
The formula used here is cash-to-cash cycle flow= (DOI) + (DOP) – (DOR).
4. Days Of Supply (DOS)
This indicator is the most common one used to measure the efficiency of the supply chain on a monthly basis. This metric measures how many days it will take for the present stock to run out or be sold completely, considering the rate of sales to be the same as last month or a recent time period. Even though most businesses use a 30-day period to calculate this, you can still use a 60 or 90-day period, depending on your business and its requirements.
This indicator, however, is subject to change due to many factors like changes in inventory that will consequently change the days of supply, or market conditions that might affect demand. That is why it is always advisable to take your reference month as one that is free of any such conditions and is a normal month. In simple terms, your base month will drastically affect the result you have at hand and in turn, influence your future business decisions, so choose it wisely.
The formula for the DOS indicator = (Average Inventory / Monthly Demand)*30
5. Gross Margin Return On Investment (GMROI)
This indicator is used to measure gross profit earned through every pound or euro, from the average investment made in buying the stock in the first place. This is very useful in terms of determining which product in the stock is the most profitable, and this results in determining what should be a significant part of the supply chain.
It will also help eliminate elements that set back your supply chain or possibly hamper its speed or affectability. The formula for GMROI = [Gross Profit] / [(Opening Stock-Closing Stock) / 2] X 100.
Conclusion
The above indicators are some of the most common, popular and easy ones used by a large number of businesses to ensure a smooth workflow for their deliveries, while also keeping overhead costs under control. Some even use a tachograph analysis software, depending on the needs of their business.
In deciding which indicators work best for you, take into account your resources, size of business and other requirements that need to be fulfilled in each of these indicators and accordingly, come to a robust solution. The aim of having an efficient supply chain is to ensure that there are no errors or shortages in the whole process. Keep that in mind and use these metrics to the best of your advantage.
