Your business has to manage many supply chain components, from product assembly to customer deliveries. With so many aspects to keep track of, trying to understand your performance success can be overwhelming.
Supply chain metrics are measurements that analyze different supply chain areas. You can use the calculations to understand what's working, what needs improving, and what next steps to take. Many metrics are available, letting you choose the ones that suit your business best.
Learn more about the supply chain metrics that matter and how they impact your organization.
What Are Supply Chain Metrics?
Supply chain metrics are performance indicators that assess operational efficiency. The calculations give you insights into features like:
- Inventory management
- Supplier performances
Many companies review various metrics to stay aware of typical performance. Supply chain trends constantly change, making evaluating your operational effectiveness essential. You can identify successful areas and aspects that need improvement.
Metrics provide data-based insights, allowing businesses to make more informed and measurable decisions. You can use the data to identify actionable goals and track your progress toward achievement. Companies can track metrics that align with their goals and most pressing concerns.
Why Are Supply Chain Metrics Important?
Supply chain metrics give you an in-depth look at your organization's performance. You can use the data to enhance all supply chain operations and build better consumer experiences. Metrics assist with:
- Enhancing efficiency: Many supply chain metrics track performance across different stages. By staying aware of current performance levels, you can identify inefficient or lacking areas. Supply chain managers can optimize approaches to improve speed and accuracy. For instance, a metric might display slow delivery times. Managers can analyze delivery techniques and adjust aspects causing delays.
- Optimizing your budget: Metrics in the supply chain also provide insights into financial well-being. Measurements like average expenses and inventory turnovers reveal your organization's current financial performance. Regularly calculating these numbers helps you understand your budgeting effectiveness. You can identify overspending areas, track average costs, and monitor spending activity. If your metrics show overspending, you can track the source and change strategies. For example, you might notice you frequently spend too much in inventory because of waste. Then, you can improve inventory management techniques to minimize wasted products.
- Improving brand reputation: You can also use supply chain metrics to improve your brand reputation. Measurements like delivery times or reasons for returns show average customer experiences. If consumers face long delivery times or damaged items, their opinion of your organization will likely decrease. Metrics increase your awareness of negative situations and give you the tools to address them. You can improve your supply chain's speed, accuracy, and customer service. In turn, your brand reputation can improve.
- Increasing agility: Speed is essential for supply chains. The faster you respond to disruptions, the better you can avoid negative impacts. Supply chain performance metrics show how well you react to changes and how your behavior affects crucial measurements. You gain a better understanding of your supply chain, which you can use to build more proactive strategies and make more informed decisions for your present and future.
Top Supply Chain Performance Metrics to Track
Although many supply chain metrics exist, you only have to track the ones that best benefit your organization. You can find metrics that match your business goals or areas for growth to make the most impact.
Here are seven supply chain metrics that can help you improve your operations:
1. Perfect Order Index
The perfect order index tracks how many orders you successfully ship without errors. A perfect order must:
- Get delivered to the correct address
- Contain the exact product and quantity
- Be delivered within the specified time frame
- Be free of damages
- Be packaged in the correct container
- Contain the correct documentation and invoice
If you miss any of these qualifications, your rate decreases.
Your perfect order index indicates the effectiveness of your supply chain workflows. A perfect order meets all customer expectations and creates the best possible experience. The higher your rate is, the better experience you build for consumers.
You can calculate your perfect order index with this formula:
- Perfect order index = (Percent of orders distributed on time) x (Percent of accurate orders) x (Percent of undamaged orders) x (Percent of orders with accurate documentation) x 100
Many supply chains track their perfect order measurement over time to gauge how their strategies shift. While achieving an exact 100% rating is rare, you can get closer by adjusting various supply chain operations. For example, if you notice your packages are frequently damaged, you can change your delivery method or packaging to protect products better. Then, you could test the metric again to see whether it shifted after you changed these approaches.
2. Days Sales Outstanding (DSO)
Another important supply chain metric is days sales outstanding (DSO). DSO tracks the typical number of days it takes businesses to receive payment for orders purchased with credit. The better your DSO, the better your cash flow and revenue levels. Lower DSO numbers mean you collect money faster, while higher numbers mean it takes longer.
It's important to keep your DSO as low as possible. Higher numbers indicate unhealthy cash flows that make managing basic overhead costs harder. If your business regularly has high DSO numbers, you might need to adjust your billing procedures or investigate customers' financial health.
Companies usually calculate DSO monthly, quarterly, or annually. The formula focuses on a specific period to provide the most helpful results possible. To determine DSO, follow these steps:
- Divide the average accounts receivable by the complete value of credit sales during a single period.
- Multiply the result by the number of days in the same period.
Various industries have different standards for high and low DSO numbers. Depending on your products and average revenue streams, your idea of a low DSO number could vary from another organization. In addition, DSO numbers affect companies in varying ways. For instance, small businesses need steady revenue streams more than major corporations. High DSO numbers could significantly impact a small business but not affect larger companies at the same amount.
3. Order Cycle Time
The order cycle time metric focuses on customer experience. It counts the number of days between an order date and the delivery date. In other words, it tracks the total amount of time from when a customer places an order to when the package arrives on their doorstep.
Your company's order cycle time gives a direct look at your efficiency. Short order cycles mean you process orders, package products, and deliver packages quickly. Customers prefer fast processing times so they can receive ordered items as soon as possible.
You can compare the order cycle time to your average perfect order index to determine how well you meet customer needs. For example, if you have rapid order cycles but frequently deliver inaccurate orders, you might need to reevaluate your order processing approaches.
You can calculate order cycle time with this formula:
- Order cycle time = (Actual delivery date) - (Customer order date)
In some cases, long order cycle times are unavoidable. Supply chain disruptions, like material shortages or extreme weather, are out of your organization's control. These circumstances make it harder to package or distribute an order on time. You can use proactive techniques to mitigate the impacts of disruptions. For example, buying extra stock of an in-demand item can prevent you from running out and delaying delivery times.
4. Inventory Turnover
Inventory turnover is also an essential metric for companies to monitor. This metric calculates the number of times your entire inventory sells within a particular period. Inventory turnover displays your efficiency in order fulfillment, production, and other daily operations. Some businesses track inventory turnover by specific stock-keeping units (SKUs) instead of their comprehensive inventory. This strategy lets you monitor a specific product's popularity and average restocking time.
You can calculate inventory turnover with this equation:
- Inventory turnover = (Total cost of goods sold) / (Average inventory value)
Inventory turnover varies widely depending on your industry. Grocery stores cycle through countless amounts of inventory, while companies managing advanced computer equipment might only have a few cycles each year. However, it's usually best to maintain high inventory turnover rates. High numbers mean you have consistent sales and in-demand products. Low turnover rates can signal uninterested buyers or possible overstocking. If you regularly fail to sell your entire inventory, you might be creating unnecessary waste.
By consistently tracking inventory turnover rates, you can understand product popularity levels. If you notice extra stock of certain items, you can reduce buying numbers to meet the demand more closely. This metric helps with financial well-being by giving you the tools to optimize your inventory.
5. Warehousing Expenses
Some supply chain metrics track specific financial measurements, like warehousing costs. Many supply chains use warehouses to store products and maintain inventory for upcoming orders. Supervisors must manage overhead warehouse costs and use their allotted space as efficiently as possible. As your business grows, warehouse expenses can change to manage increased or decreased inventory. This supply chain metric increases your awareness of warehouse spending, helping with financial health.
To measure the warehouse expense metric, you can add up every monthly or annual cost. Common warehouse expenses include:
- Labor costs
- Utility bills
- Equipment management
- Technology or informational systems management
- Cost of acquiring goods
- Storage prices
You can determine each element's typical monthly or annual cost, then add them together. Businesses often look at this metric every quarter or year to identify how their spending habits change over time. If you notice your overall spending average increasing, you can study individual components and look for ways to save. You might find some overhead costs are unnecessary during your calculations and reduce them as a result. For example, you might pay for storage space you don't use, impacting your monthly budget.
6. Order Fill Rate
Another popular supply chain metric is the order fill rate. This measurement refers to the percentage of orders you can ship immediately from on-hand stock. Order fill rate is an essential metric for customer satisfaction — if you have products in inventory, you can fulfill the order more quickly. You might have poor order fill rates if your company has frequent stock-outs or takes a while to replenish stock. The longer customers wait for their orders, the more dissatisfied they become.
The order fill rate formula is:
- Order fill rate = (Total number of customer orders shipped / Number of orders placed) x 100
You can use the order fill rate to understand how well you meet customer demands. Low numbers mean you take too long to ship items or could fail to ship them at all. To build customer loyalty, you should maintain fast processing and shipping times.
Luckily, you can use many strategies to improve your order fill rate, such as:
- Using demand forecasting: Demand forecasting is an advanced tool that helps supply chains predict customer buying trends. Solutions with automated features can use current and previous buying patterns to anticipate upcoming behaviors. You could invest in new technology that helps you stock inventory more effectively.
- Improving replenishment techniques: You could also adjust replenishment strategies to ensure you have enough stock items for customers. Many supply chain technologies have automated restocking features. Systems notice when an item runs low and automatically place a replenishment order to avoid stock-outs.
7. Reason for Returns
Companies can also evaluate customers' reasons for returning orders. Returns can disrupt supply chain workflows — you have to receive them, update the inventory database, and send the items back to the proper inventory location. Return items can also signal unhappiness with a product, which could affect customer loyalty rates.
This supply chain metric tracks returns and their common reasons, helping you improve customer satisfaction. If the purposes are because of defects, delivery errors, or other elements within your control, you can alter your strategies to minimize returns.
For example, you might find customers frequently return items because they have damages. You can look for the damage origins, such as improper handling during delivery or incorrect package size. Then, you can provide extra training for distribution and packaging procedures, making sure employees perform these steps correctly.
Many companies track return reasoning by surveying customers when they submit their returns. In-store employees can ask consumers why they need to return the item and record their response in the system. You can also require an explanation when consumers submit a return request online, like providing a list of options.
When you have enough responses, you could organize them into a chart or table to identify the most frequent answers.
Learn More About Osa Commerce Today
Supply chain metrics help you understand your company's performance. You can use the measurements to track progress toward goals, gain insights into customer satisfaction levels, and regulate financial health.
Software solutions make it easier to calculate and track metrics. At Osa Commerce, we understand the importance of supply chain visibility and data-based insights. Our Collaborative Visibility Platform increases transparency in every stage of supply chain operations, from order fulfillment to warehouse management. AI-powered tools forecast trends and provide deep data insights, helping you make more informed decisions. You can improve your supply chain metrics with adaptive inventory management, instant insights, and more.
To learn more, contact Osa Commerce today.
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