What are key performance indicators (KPIs) of supply chain metrics?
Multi-and omnichannel supply chains enable organizations to deliver their products through flexible sales channels and master the complexities of eCommerce fulfillment. However, poor inventory accuracy or parcel shipping mistakes can result in a bad shopping experience for customers.
Supply chain disruptions already negatively impact 75% of companies, whereas 55% of companies are downgrading their growth projections.
Supply chain KPIs are metrics that help you measure and track the performance of your supply chain operations to foresee potential disruptions. They uncover actionable insights about your business operations and encourage you to make better decisions that improve your supply chain performance.
In this article, we’ll review some of the most important supply chain parameters you should regularly monitor to increase productivity and enhance customer satisfaction.
Why are logistics KPIs and metrics important?
Logistics KPIs are useful indicators that quantify the performance of supply chain processes. Managers use these metrics to reveal inefficiencies within the company’s operations and identify strengths and weaknesses.
Supply chain KPIs serve as benchmarks that allow businesses to compare the effectiveness of supply chain operations over time and with other companies in the same industry. They also reveal how successful your business has been in achieving supply chain objectives.
Moreover, supply chain KPIs help you make better-informed decisions about sourcing raw materials, optimizing product inventory, improving budget planning and forecasting, and speeding up fulfillment operations.
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5 Supply Chain Metrics to Track to Reduce Shipping Costs
Here are the 5 important supply chain metrics you need to monitor to optimize your supply chain operations and reduce shipping costs.
1. On-Time Delivery Rate
According to a Voxware study, 69% of customers are less likely to purchase again from an eCommerce seller if an order is not delivered within two days of the promised delivery date.
On-time delivery is a critical order fulfillment KPI to track. It measures your company’s ability to meet customer orders within the committed timeframe.
Here’s the formula for calculating time delivery:
On-Time Delivery Rate = Total Number of Orders Delivered on Time/100
Some of the most common reasons for late deliveries are longer transit times, spikes in order volumes, and disruptions due to bad weather. But real-time order tracking allows you to track shipping dates and monitor deliveries to your customers.
And the insights from on-time delivery KPIs give you a solid starting point to investigate delivery issues, identify possible bottlenecks, and optimize delivery processes.
This supply chain performance metric can also illuminate customer satisfaction. For example, if you have a low on-time delivery percentage, it’s doubtful your customers are pleased with the delivery experience.
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2. Customer Order Cycle Time
68% of customers are more likely to place an order if they’re offered fast shipping, making customer order cycle time an important shipping KPI that helps you determine the speed of your order fulfillment process. The customer order cycle time is the average time it takes in days for the customer to place the order, the supplier to prepare the order, and for the customer to receive the order.
Here’s the formula for calculating the customer order cycle time of a supply chain:
Customer Order Cycle Time = Source Cycle Time + Make Cycle Time + Deliver Cycle Time
With the above formula, you can also see what’s slowing down your supply chain, and accurately pinpoint if:
- Source cycle time is overshot and causing a delay in manufacturing goods
- Production and shipping is a challenge
- Logistics and transport systems are failing to deliver orders on time
A longer order cycle time can be due to slow order processing systems, supplier lead times, and payment processing. Once you’ve identified the issues in your order cycle, you can work with your inbound, internal, and outbound teams to lower the time of your order fulfillment processes.
Fast delivery times has made Amazon a leader in customer experience. It’s conditioned online customers to expect fast shipping times for online orders—otherwise known as the “Amazon effect.” But you can compete with Amazon’s vast network of fast, last-mile delivery through KPI tracking and network optimization.
This can pay off in more ways than one. 48% of online customers are willing to spend more for a product if it comes with fast shipping.
3. Shipping Costs
Shipping cost per order is a carrier performance and distribution metric that shows how cost-effectively you are fulfilling customer orders.
Here’s the formula for calculating shipping cost per order:
Shipping Cost per Order = Total Shipping Costs / Number of Shipments per Period
This supply chain management KPI allows you to keep track of transportation costs and alerts you when the budget is out of control.
A high shipping cost per value indicates that you’re losing money on deliveries, so you should implement ways to optimize. There are a number of ways you can lower shipping costs through order consolidation, discounted shipping rates, and reducing shipping distance by storing portions of your inventory at a 3PL distribution center.
4. Order Picking Accuracy
The 2020 DC Measures benchmarking report found order picking accuracy as the third most important benchmark for warehouses.
Order picking accuracy is a supply chain KPI that uncovers the percentage of error-free orders shipped by your business.
Here’s the formula for calculating order picking accuracy:
Order Picking Accuracy Rate = (Number of Error-Free Orders/Total Number of Orders) X 100
Low order accuracy indicates that you have a high number of inaccurate orders reaching customers. Around 55% of warehousing costs can be attributed to order picking, and managing it properly helps you save time and money.
You can improve this perfect order fulfillment metric by implementing better control standards, providing extensive training to your staff, and automating inventory management.
5. Inventory Turnover
Inventory turnover is the number of times a company sells and replaces its stock of goods in a time period. The frequency at which the complete inventory gets sold out is called inventory turnover.
This KPI lets you calculate which inventory is moving slower compared to the other goods on the shelf. A low inventory turnover reflects a decline in demand. This could be due to a downtrend in consumer buying behavior, or you may be overstocking. Similarly, a high inventory turnover shows that the demand for your products is high, and you need efficient restocking to prevent stockouts.
Here’s the formula for calculating inventory turnover:
Inventory Turnover = Annual Cost of Goods Sold / Average Inventory
or
Inventory Turnover = Annual Cost of Goods Sold / [(Year-End Inventory + Beginning Inventory)] / 2
Where Average Inventory = Average amount of your inventory over two (or more) accounting periods.
Let’s look at an example.
Assume a retail chain ABC has reported $500 billion in annual sales with a year-end inventory of $40 billion, beginning inventory of $35 billion, and an annual cost of goods sold worth $350 billion.
ABC’s inventory turnover for the year is calculated as shown below:
Inventory Turnover = $350 billion / [($40 billion + $35 billion) / 2] = 9.33 times
This means that ABC company is turning over (selling and replacing) its inventory 9.33 times a year.
ABC’s Days Inventory:
Days In Inventory = Days In Year / Inventory Turnover
= 365 / 9.33
= 39.12 days
This means that it takes 39.12 days for ABC company to sell its entire inventory.
Inventory turnover is also a useful performance indicator of a company’s sales and marketing, production planning, process planning, and fulfillment capabilities.
You can improve inventory turnover by enhancing demand forecasting, automating inventory management, and developing an effective marketing strategy.
Keep track of the most important shipping metrics for shippers and eCommerce businesses with Sifted
Monitoring the supply chain metrics of your business enables you to measure the success of your supply chain operations and spot opportunities for optimization.
Sifted’s Logistics Intelligence solution offers tools for shippers and eCommerce businesses to keep track of their important metrics and KPIs to reduce shipping costs.
Ready to optimize your supply chain operations? Get a free demo from Sifted!
