Inventory is key to your business’ success. It’s important that your business manages it well and keeps it in balance to operate at optimum levels.
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Too much inventory increases costs and ties up your cash, while too little inventory jeopardizes your sales and lowers customer satisfaction.
Supply chain key performance indicators (KPIs) are metrics and measures that help determine the efficacy and efficiency of supply chain processes. Supply chain metrics use data from procurement, logistics, operations, inventory, warehousing, distribution, and fulfillment processes.
There are hundreds of supply chain KPIs that will matter to you depending on the type of business, industry, reliance on suppliers, and the extent of the extended supply chain. The KPIs can extend to the entire supply chain or be limited to your supply network.
Types of Supply Chain KPIs
Inventory KPIs help improve your purchasing, storage, and production processes. They can also help you measure the impact of business operations. There are several KPIs that you can use. Because companies and industries are different, the KPIs you choose to use depend on your circumstances.
KPIs can differ according to the product and supply chain; for example, the metrics differ for the stocked product, make-to-order, and engineer-to-order supply chains. The most notable ones are listed below.
Inventory turnover or days on hand measures the number of times you have sold and replaced inventory in a given period. If the result is low, it means that inventory is too high or sales are too low. The formulas are the cost of goods sold divided by average inventory or sales divided by inventory.
Average days to sell inventory (DSI) measures how long your business takes to turn inventory into sales. The formula is ( inventory ÷ cost of sales) × 365. The KPI varies across industries. For example, high-cost products tend to move slowly, and perishable goods need to move fast.
Average inventory estimates how much inventory your business has at a given time frame. The formula is (beginning inventory plus ending inventory) divided by 2. You use the KPI to avoid spikes or random drops in inventory so as to have a constant in and outflow of inventory.
Holding costs refer to the cost of storing unsold inventory. It includes expenses for goods that are damaged and spoiled. The KPI also includes charges for storage space, labor, and insurance.
Stock-out is the number of times the business didn’t have stock to meet sales.
Service level is the amount of inventory necessary to avoid a stock-out. Service level is thus a compromise between the cost of inventory and the cost of a stock-out.
Lead time is the amount of time it takes the supplier to deliver a product and the amount of time it takes until you need it again.
Rate of return measures the percentage of orders that customers return and you need to restock.
Inventory accuracy measures the precision of your inventory system by comparing what’s on your shelves with what your system says.
Perfect Order Rate
Perfect order rate is the number of orders with the correct product, delivery place, package, quantity, and documentation. The higher the rate, the better your customer satisfaction.
What Makes KPIs Effective
Your supply chain KPIs are a product of your supply strategy. Your supply strategy must align with your business plan to have effective KPIs, especially how the eCommerce order fulfillment process works. Once your supply chain strategy aligns with your business objectives, it will be clearer as to which KPIs are worth following.
As the numbers start to come in, avoid trying to change or manipulate them. Numbers tell a story, and if they are bad, it is common for employees, especially management, to meddle with them. For example, if your KPI reveals a lack of performance regarding the delivery of goods, staff might manipulate the numbers by asking customers to accept a later delivery date. If anyone manipulates the numbers, your business won’t get to the core problem.
You can use many KPIs, but that doesn’t mean you should use them all. Choose the metrics that matter so that you can get valuable data rather than becoming stuck in analysis paralysis. You can limit your KPIs to three for each supply chain function or limit it to 10 KPIs for the entire supply chain.
Measure Supply Chain’s Performance
Supply chain KPIs are essential to measuring your performance. Make sure that they align with your overall business objectives. Choose the KPIs that matter, and follow the data. The ability to measure KPIs that tell the true story of your supply chain are the only ones that should matter. Narrowing down to the metrics that are most relevant to your specific processes makes all the difference in how effective they are.