Measuring supply chain performance is crucial for every business organisation as it helps identify areas of improvement, optimise efficiency and enhance overall productivity. In order to achieve the same, various industries deploy multiple metrics and key performance indicators. Such include perfect order index, supply chain cycle time, and inventory turnover, among others.
With that being said, here is a detailed article highlighting the seven most effective metrics to help evaluate your supply chain performance.
Simply put, inventory turnover refers to the total number of times your entire inventory has been sold during a specific period of time. The formula for the same goes as follows,
Inventory turnover = Cost of goods sold/ Average inventory.
It is a key metric that helps to assess how efficiently an organisation manages its inventory. For example, a high inventory turnover rate signifies that inventory is sold quickly with minimal excess stock. Simultaneously, a low inventory turnover rate indicates weak sales performance and inefficiencies in the supply chain process. However, inventory turnover benchmarks usually vary across different industries.
By keeping track of this inventory turnover rate, organisations can identify potential issues in their inventory management, optimise stock levels and improve the overall efficiency of the entire supply chain process.
Perfect Order Index
Perfect Order Index is another key metric used to assess the error-free rate of the entire supply chain design. It is a composite metric, meaning it takes into account various factors such as on-time delivery, complete shipment, error-free documentation, and accurate product selection, among others. To calculate the Perfect Order Index (POI), we use the below-mentioned formula,
POI= (Number of Perfect Orders/Total Number of Orders)* 100
The higher the POI, the greater the number of orders that have been fulfilled accurately and completely, leaving no room for any form of error. By using this metric, business organisations can identify all the weaknesses in their supply chain processes and take the necessary action to rectify them.
Cash To Cash Time
Cash-to-cash time, also referred to as C2C, is another key metric deployed by various organisations to measure supply chain performance. It represents the time utilised by a company to convert its investments in inventory and other inputs into cash flow from sales. It primarily comprises three supply chain measurements, namely,
- Days of inventory
- Days of payables and
- Days of receivables
A shorter C2C time indicates an efficient supply chain performance, meaning that companies can quickly turn their investments into cash, leading to improved liquidity and financial stability. Contrarily, a greater C2C time reflects inefficiencies in inventory management, payment collection, and supplier retention.
Fill rate signifies the actual percentage of customer demand that any business organisation can fulfil from its available inventory without any backorders or stockouts. Reviewing this metric regularly helps companies to measure their supply chain performance, specifically in terms of order fulfilment.
Let’s explore a small example of how we can calculate the fill rate.
Say, a company has received a total number of 100 orders, out of which it has been able to fulfil 95 orders without any backorders. Then the fill rate would be,
Fill Rate (%) = (95/100) *100 = 95%.
Gross Margin Return On Investment
Gross Margin Return On Investment, commonly referred to as GMROI, enables businesses to evaluate the profitability of their inventory investments and assess the efficiency of their inventory management practices. In order to calculate GMROI, we use the following formula,
GMROI = (Gross Margin/Average Inventory Cost) * 100
Here, Gross Margin refers to the difference between the total sales revenue and the Cost of goods sold. On the other hand, Average Inventory Cost is the average value of inventory held, during a specific duration of time, such as a month or a quarter.
Warehousing, as we all know, is by far one of the most important components of the whole supply chain process. Therefore, monitoring the Cost of the same is equally essential as it helps to provide valuable insights related to cost optimisation and process improvement. While calculating warehousing costs to measure supply chain performance, we take into consideration multiple factors, such as,
- Labour Costs
- Inventory Holding Costs
- Material Handling Costs
- Transportation Costs and
- Utility Costs, among others.
By thoroughly scrutinising the warehousing costs, enterprises can make data-driven decisions to streamline all their operations while simultaneously reducing costs and enhancing the overall supply chain performance.
Customer Order Cycle Time
Customer order cycle time, as the name suggests, refers to the total time taken from when a customer first places their order to the moment the order gets delivered to the customer’s doorsteps. It serves as a crucial metric for measuring supply chain performance, as it is directly related to customer satisfaction and loyalty.
A shorter customer order cycle time can enhance a business's overall competitiveness, resulting in increased customer retention and loyalty. In addition to this, it also plays a crucial role in identifying any bottlenecks or inefficiencies in the supply chain process.
Ensuring an efficient supply chain performance is important for every business, regardless of the industry type. It not only helps to enhance operational efficiency but is also effective in reducing costs and driving the overall success of a business, especially in today’s dynamic and competitive marketplace. To achieve the same, you can refer to the above-mentioned seven metrics that help to fully understand the supply chain performance of your business.
Additionally, if you wish to gain more insight into managing the supply chain process or if you want to pursue any C-suite roles related to this industry, you can refer to various supply chain analytics course available online.
One such includes the Executive Certificate Programme for Strategic Chief Operating Officers, offered by Imarticus in collaboration with IIM Raipur.
It is a comprehensive 10-month supply chain management program specifically designed for candidates who wish to upskill their strategic, operational, and technical skills related to this field.