Industry Insights From Renewal Logistics:
How To Determine If Your Business Is Performing Well
How do you know if your business is performing well? Aside from looking at your profits, the secret lies within your supply chain Key Performance Indicators (KPIs).
Using common supply chain formulas and calculations will give you a clear picture of how your business is doing and if there are any gaps that you should be dedicating more resources and attention to.
KPIs act as benchmarks that help you track the operational metrics of your business and reveal how effectively your company is at meeting targets. It also guides business leaders to make future projections based on your current progress.
In this article, we’ll cover the most common supply chain metrics to track and why they’re important.
What Are Supply Chain Metrics?
Supply chain metrics, also known as supply chain key performance indicators, or KPIs, are the numbers and ratios used to measure business performance.
Supply chain metrics quantify different aspects of your supply chain, such as delivery and inventory movement, to provide insight into the efficiency and quality of those functions.
Why Are Supply Chain Metrics Important?
Supply chain metrics are essential for measuring a company’s performance and success. The data provides visibility into key functions to ensure that every part of the supply chain is being tracked and is operating smoothly.
Metrics also provide insight into what areas a business may need to improve upon or change to meet or exceed business demands. With a better understanding of supply chain performance, businesses can be more proactive when facing challenges as well as increase their resilience and agility.
Breaking it Down: We’ll go over the most common supply chain KPIs that can help you understand how your supply chain is performing.
Common Supply Chain Metrics To Track
1. On-Time Delivery (OTD)
This metric measures the percentage of deliveries that were made on time.
This metric is very important for understanding your supply chain’s ability to fulfill orders by the promised date or ETA.
How to Measure on-time delivery (OTD):
OTD = (On-time deliveries) / (Total deliveries) x 100
For example: If out of 600 orders that were delivered, only 522 were delivered before the promised delivery date. In this case, your on-time delivery date would be: OTD = 522/600 x 100 = 87%
In general, if you want to satisfy and retain customers, your business should strive to maintain at least a 95% OTD rate.
2. Damage-Free Delivery
This metric measures the number of orders that arrived damage-free. Many organizations consider this an important supply chain key performance indicator (KPI) because it directly impacts customer satisfaction and inventory loss.
A high damage-free delivery percentage is crucial to an e-commerce business’s bottom line, as it almost always costs a business a lot of money, time, and effort to replace damaged items.
The formula for calculating the damage-free delivery rate is:
Damage-free delivery rate = (Damage-free deliveries) / (Total deliveries) x 100
That means if 580 orders arrive undamaged out of a total of 600 shipments, your damage-free delivery rate would be 96.67%. Damage-free delivery rate = 580/600 x 100 = 96.67%
A good practice to keep your damage-free delivery rates high is to optimize and keep supply chain touchpoints low. The fewer hands touch the package, the more successfully it will be delivered to your customer. You do not want your rates to drop below 95%.
3. Perfect Order Rate Or On-Time In-Full (OTIF)
Some businesses get more granular. They want to know the perfect order rate, which tells you the percentage of orders that were not only delivered on time but also error-free.
This particular insight is one of the most critical supply chain KPIs for businesses operating in a multitude of sectors. The perfect order rate measures the success of your ability to deliver orders incident-free.
A low perfect order rate score will help you identify the areas for you to improve. Dig deeper to determine what inaccuracies, damages, delays, and inventory losses are preventing your from a perfect order rate.
The higher the perfect order rate, the better, because this KPI has a direct impact on your customer retention and loyalty.
4. Inventory To Sales Ratio (ISR)
Any accountant will tell you that inventory is money sitting idle. The ISR compares the average value of your inventory for a given period, to net sales for that same period. This is just one metric, used chiefly in balance sheet analysis, that is related to a bundle of other metrics that give you an idea of the state of your inventory management. Others include:
- The average number of days you hold inventory before selling it (days inventory outstanding)
- The inventory turnover ratio measures how many times you sell and replace your inventory over any given period.
- The ratio for days of inventory outstanding is calculated by dividing the value of the inventory by the cost of goods sold (COGS), and then multiplying by 365. Since the ideal ratio varies depending on your industry, it is worth comparing your ratio with that of other companies in your industry.
- Inventory turnover is the ratio of COGS to average inventory. If your company carries physical inventory, then this might be a significant ratio to watch.
An increase in the ISR may indicate that your investment in inventory is growing quicker than your sales, or that your sales are decreasing.
If the ISR decreases, it could mean that your investment in inventory decreases in relation to sales or that sales are growing.
5. Customer Order Cycle Time
This metric measures the number of days between the moment a business receives an order and the moment that order arrives on the customer’s doorstep.
A shorter order cycle time typically translates to higher supply chain efficiency and a better customer experience. While longer lead times and slower shipping rates caused by supply chain crises can inflate cycle time, 2 days is a good benchmark to aim for.
You can calculate your customer order cycle time with the formula below:
Customer order cycle time = (Actual delivery date) – (Purchase order creation date)
For example, let’s say you received the order on September 20 and delivered it to the customer on September 25, your order cycle time will be: Customer order cycle time = 25 – 20 = 5 days
6. Freight Bill Accuracy
Shipping and freighting your items from supplier to warehouse or warehouse to the consumer is vital to the success of your entire operation, and any issue or error can prove harmful with time and investments being wasted.
Billing accuracy is critical to profitability as well as customer satisfaction, so tracking this particular metric will help you spot detrimental trends, improve your overall shipping accuracy, and ultimately, help your business grow. Here is how freight bill accuracy is calculated:
As the name suggests, this metric measures the number of accurate freight bills. Freight bill accuracy can help identify negative trends in billing operations.
The metric is calculated using the formula below:
Freight bill accuracy = (Number of correct freight bills / Total freight bills) x 100
So, let’s say out of 600 freight bills, 500 of them are accurate, your freight bill accuracy rate would be: Freight bill accuracy = 500/600 x 100 = 83.3%
Once again, the ideal freight bill accuracy rate is 100%, as an inaccuracy rate of even just 5% can cause significant issues in your billing operations.
7. Inventory Turnover
Your business’s inventory turnover ratio measures how many times your entire inventory has been sold and then replaced within a given timeframe.
One of the most helpful supply chain KPIs available today focuses on logistics KPIs and helps a business understand the number of times its entire inventory has been sold over a certain time frame: an incredible indicator of efficient production planning, process strategy, fulfillment abilities, and marketing and sales management.
By calculating your on-time shipping rate and comparing it to other competitors within your industry, you will be able to create a clear management reporting practice, see where you stand, and take the appropriate action to improve it over time – this will result in a boost in brand authority as well as an increased bottom line.
Inventory turnover is an extremely versatile metric, and can be used to evaluate the efficiency of your operations, your order fulfillment processes, and your production processes. You can even calculate turnover on the SKU level to identify which SKUs are selling well and which ones are slow-moving.
The following formula is used for calculating inventory turnover:
Inventory turnover = Cost of goods sold (COGS) / Average inventory value
For instance, if your COGS in the previous quarter was $100,000, and your average inventory value in that quarter was $25,000, your inventory turnover would be as follows: Inventory turnover = 100,000/25,000 = 4
That means that in the previous quarter, you completely sold and replenished your inventory 4 times.
For most retailers, an inventory turnover rate between 2 and 4 is ideal. However, this can vary by industry.
8. Gross Margin Return On Investment (GMROI)
Every business, regardless of service, product, or sector strives to achieve the best return on investment (ROI) for each and every commercial activity it undertakes. Maintaining a consistently solid ROI is the bread and butter of ongoing eCommerce success.
In supply chain metrics, the GMROI offers a clear representation of the gross profit gained for every dollar of the average investment made in your inventory: a calculation achieved by dividing the gross profit by the average inventory investment. By tracking this KPI on a monthly basis, you’ll quickly gain an insight into which items in your inventory are poor performers and which are worth investing in more – gold dust in terms of business-based information.
9. Return Reason
Returns are never fun, but they happen. Fortunately, we can use that data to improve our supply chain.
It’s best practice to understand return reasons in your supply chain so that you provide a better product for your customers. By gathering return reason data, you will gain valuable insight into the various motives that are causing your customers and clients to return their orders.
A “reason for return” field should be required of your customer. With this data, you will be able to assess your areas of weakness in either your supply chain or product development and make the necessary improvements that will enhance not only your reputation but the overall quality of your products significantly.
With this level of insight, you stand an excellent chance at decreasing returns and increasing profits.
These 9 KPIs are some of the most common metrics we use to help improve the supply chain performance of our partners.
Renewal Logistics’s dashboard maintains end-to-end supply chain visibility, and lets you keep track of how different supply chain functions are performing over time. With our analytics reporting tool, you’ll get accurate insights into your supply chain performance to identify room for improvement in shipping, fulfillment, inventory, and warehouse operations.
Our logistics expertise ensures that all your supply chain processes identify and eliminate bottlenecks, and save time and money.
Want to learn more about KPIs from a contract logistics standpoint? Give us a call or shoot us an e-mail. We’d love to connect with you.