If you’ve ever seen the flight deck of a modern airliner, you know even with the large multi-function displays located in front of the pilots, that there are still many other gauges and instruments seemingly demanding attention—enough to make you wonder how the crew can possibly monitor them all.
In reality though, the majority of those instruments are there for reference in case of exceptions to normal flight conditions. Instead of trying to keep an eye on everything, airline pilots maintain a more or less continuous scan of five or six key indicators, which on the latest aircraft are all visible on the multi-function display monitor.
The Supply Chain Manager’s Multi-function Display
By now, you’re surely wondering what airliners have to do with supply chain KPIs. If so, please bear with us, because the link is not as tenuous as it might appear. You see, the set of primary data needed to keep an airliner aloft is (apparently) relatively simple—and the same is true of running a supply chain organisation.
It’s not uncommon though. for companies to make the mistake of over-complicating their supply chain performance monitoring.
While having too many KPIs is certainly better than having none, it can easily get in the way of progress by creating a confused, complex mass of information that becomes difficult to sort out and act upon. “Paralysis by analysis” is a common term used to describe such a situation, and it can be avoided by monitoring a smaller number of carefully chosen KPIs.
These key metrics become your organisation’s “multi-function display” and give you the primary data needed to monitor and manage “normal flight conditions.”
Feel free to track lots more metrics in the background if you wish, but try to keep attention focused on the five or six “real KPIs.” They will give you the most important supply chain performance headlines at a glance.
The 6 Most Useful Supply Chain KPIs
It shouldn’t be too difficult to determine which KPIs should be selected for your multi-function display, but of course, every company and its supply chain is unique, so the information in this post is not intended to be prescriptive. It’s meant merely as a common-sense guide to the supply chain KPIs which for most organisations, are the most reliable sources of actionable performance data.
1. Perfect Order
Even if you chose no other KPIs for your supply chain organisation, perfect order should be considered as an absolute essential. Unlike most of the other KPIs we recommend, perfect order is actually a composite of a number of important metrics.
Perfect order results can help you assess performance and diagnose issues impacting service, costs, and overall supply chain effectiveness.
The key components of the perfect order KPI are as follows:
- On time delivery: This is typically determined by calculating the percentage of sales orders that arrive on time.
- In full delivery: This KPI tracks the percentage of sales orders that are delivered completely, meaning that the customer receives the correct items, in the correct quantities.
- Damage-free delivery: This measurement is sometimes incorporated into the in full metric, but can just as easily be a stand-alone metric.
- Accurate documentation: Like the other perfect order components, this metric generally records a percentage of sales orders which were accompanied by accurate documents throughout. Documents included in the metric can vary, but usually include advance shipment notifications (ASNs), labels, and invoices.
As an example of how illuminating the perfect order KPI can be, let’s look briefly at damage-free delivery as an example.
If your company is suffering from a low percentage of damage-free deliveries, you can safely assume that service is suffering, since customers are not receiving their orders in full.
In many cases, your distribution operation will incur unwanted costs to manage returns of damaged items and deliver replacements to the customers (not to mention the cost of writing-off damaged inventory).
Finally, you clearly have a problem with supply chain effectiveness, since the processes you have in place are not effective in minimising inventory damages. Each of the perfect order metrics provides similar insights into service, cost, and supply chain efficiency/effectiveness, which is why perfect order holds premier position in our top six supply-chain KPIs.
2. Fill Rate (Order Fill, Line Fill, Unit Fill)
While fill rate might be one of the components making up your perfect order KPI, it’s not a bad idea to keep track of order fill and line fill as KPIs in their own right, especially if in full performance is not trending above 98%.
Fill rate KPIs allow you to look a little more closely at in full performance. For example:
- Order fill monitors the percentage of orders successfully delivered on the first attempt
- Line fill monitors the percentage of order lines successfully delivered on the first attempt
- Unit fill monitors the percentage of items delivered on the first attempt
Feel free to choose the fill rate KPI that fits best with your operation, or use them all if it makes sense, but remember the goal is to keep your multi-function display simple.
3. Cash to Cash Cycle Time
When a KPI has the word “cash” twice in its title, you might think it to be a purely financial KPI; but actually, cash to cash cycle time can also tell you about other aspects of supply chain health.
If you can see the cycle time reducing for example, that’s a good indication that leanness is increasing. Moreover, the less time your operating capital spends tied up, the greater your business’ profitability. Cash to cash cycle time also serves as a guide to how well your supply chain assets are being utilised.
4. Inventory Days of Supply
This KPI tells you the number of days your inventory would last without replenishment, before running out. The calculation requires the amount of inventory on hand to be divided by the average daily consumption of the same.
The goal should be to see inventory days of supply coming down, but not to the point where your supply chain becomes vulnerable to demand spikes or production/supplier delays.
5. Customer Order Cycle Time
The customer order cycle time KPI is useful for evaluating customer service and supply chain responsiveness. It measures the number of days between receipt of a purchase order and completion of the customer’s delivery.
Customer order cycle time also helps when diagnosing issues with the cash to cash cycle, especially if the latter is increasing over time.
If the cash to cash cycle is lengthening, but the customer order cycle is not, you know you’ll need to investigate other areas, such as supplier lead times, invoicing times and accounts payable or receivable.
6. Total Supply Chain Management Cost as Percentage of Sales
If there were an award for “KPI with the longest name,” this one would surely win hands-down. However, despite its lengthy moniker, total supply chain management cost as percentage of sales is one of the most common financial KPIs used by supply chain organisations.
Some companies prefer to track absolute supply chain cost, or costs for a unit of weight or even a sold unit such as a case or pallet. The use of these alternative supply chain cost KPIs is understandable, but for the primary measurement, TSCMC%S (our unofficial abbreviation) will serve as well as any.
If you do use this metric as one of your top 6 primary KPIs, just be aware that it can sometimes hide increases in absolute costs, especially when markets are performing well. As sales slump during a downturn, the likelihood is high that the percentage metric will swing alarmingly upward. For this reason, it’s wise to track absolute supply chain costs as well as TSCMC%S.
Keep Everyone’s Dashboards Simple
The KPIs discussed so far are really most suitable for monitoring at the executive level in your organisation, and of course, to be available for staff at all levels to see how your supply chain is performing as a whole.
However, in addition to simplicity, one of the golden rules of KPIs is that each one must be actionable and relevant. In other words, the target audience should comprise people with the physical ability to make changes that will improve the measured performance.
Therefore, while it is of course, essential to let everyone in your business see the KPIs discussed above, it’s not hard to see that with the exception of the C-Suite, and managers at the most senior level, your workforce in general is unlikely to be able to use them as a basis for action.
At the executive level of course, the response when KPIs indicate an issue will typically be to pass instructions down the line to analyse the reasons for underperformance, and make the changes necessary to improve.
In order to comply with those instructions though, managers and staff at the lower levels will need their own sets of KPIs, designed to provide a narrower focus. These metrics will typically be divided into functional categories, each supporting the top six cross-functional KPIs.
Here too though, it’s best to try and keep things as simple as possible, tasking managers and teams at each level to monitor only those KPIs that track processes over which they have direct control.
Lower-tier KPIs in Action: An Example
Let’s take the transport office and fleet management team as an example (assuming you have an in-house fleet and transport workforce). KPIs for your transport manager could include the full perfect-order metric, because he or she will need to ensure that…
- Your truck drivers leave the DC on time and deliver on time to your customers
- Your trucks are driven carefully and goods are handled properly to avoid damages
- Delivery documentation is completed accurately
- Your truck drivers do not make mistakes, such as delivering too many of a given item to one customer and short delivering another.
These aspects of delivery are all under the control of the transport manager, so are actionable and relevant.
Focusing in with Lower-tier KPIs
On its own, the perfect order KPI does not have a narrow enough focus to enable analysis by the transport manager. He or she will also need some supporting KPIs. For example, you might measure the following delivery-performance aspects:
- Number/percentage of units broken/damaged in transit
- Percentage of POD documents completed accurately
- Number/percentage of shipments dispatched on time
These additional KPIs will help the transport manager to identify just how effectively his team is contributing to perfect order performance. They are also measuring performance elements that the transport manager is responsible and accountable for, so there is no question about his/her ability to act upon what the measurements reveal.
Lower-tier Financial KPIs
Similarly, it makes little sense to implement the TSCMC%S in the transport department of your company. Many factors can influence total supply chain management costs, and the transportation team has control over just a few of them.
However, you certainly should have your transport people track outbound delivery costs as a % of sales. Your warehouse team should track warehouse costs as a % of sales, and so on.
It is apparent then, that throughout your supply chain operation, the number of actual KPIs being tracked will be many. That’s all the more reason to avoid having too many KPIs in your high-level dashboards, because otherwise, at the lower levels, managers’ dashboards really will start to resemble the confusion of dials, gauges, and meters adorning an airliner’s flight deck.
What’s in Your Multi-function Display?
If there is one “must-have” supply chain KPI, it’s probably perfect order. Otherwise, you can choose from among the top six metrics covered in this post. The key is to keep things simple and focus predominantly on a “multi-function” instrument panel (or dashboard).
By all means monitor other metrics in addition to the Top six (indeed, most supply chain components will need their own KPIs, like a metric for picking accuracy in the warehouse for example).
Try to maintain extra metrics as secondary diagnostics though and keep your high-level, cross-functional KPIs at the forefront. This approach will help to save you from paralysis by analysis. It will also enable you to keep a constant pulse on the measures that matter—just like those pilots do by constantly scanning a half-dozen or so instruments on their multi-function displays.
This post was originally published in July 2017. It has now been revamped to include additional content, making the article more comprehensive and informative.