Key performance indicators (KPIs) are the metrics that make it easy to manage complex tasks. These are useful for most companies in the world but, most recently, they’ve become crucial to the world of supply chain where needs can change on an hourly basis. Thus, by monitoring supply chain KPIs, you can identify issues before they arise and arrange to tackle them with timely interventions.
Afterall, operational success depends on how you manage your supply chain. Research indicates that the primary cause of customer dissatisfaction is poor management which, in turn, results in organizations losing their competitive advantage.
In supply chain logistics, tasks are often interconnected like a domino structure. If one area performs poorly, it will have a domino effect and may lead to large-scale consequences. Hence, proactive management, which includes tracking KPIs and metrics, may help avoid potential challenges. By taking this approach, a company will be able to know areas of concern and gain some time to respond to upcoming disruptions and inefficiencies.
In this article, we go deep into KPIs that are commonly used in the supply chain industry. More specifically, we look at nine common KPIs used by experts to manage their supply chain logistics business with a proactive and intelligent approach.
9 Supply Chain KPIs
While the specific KPIs for a company might change given its industry and needs, there are at least nine that are worth tracking. Here, as in many other sectors, the formula of being a jack of all trades is relevant. Mastering a single KPI may help you in the short run. However, to maintain a competitive advantage, you must keep working on all supply chain key performance indicators (KPIs) and improving them simultaneously.
Below, we go deeper into each of the KPIs and how to measure them:
1. On-Time in Full (OTIF) and Delivery ETA
On-Time in Full orders, or OTIF, refers to the share of shipments that arrive in the agreed upon time and containing the agreed upon materials. That is, the share of orders that were successful.
Supply chain logistics involves many destinations and hundreds of thousands of products to ship and track. That is why it is pretty challenging to manage OTIF and predict ETAs manually. At the same time, these factors are crucial to avoid delivery delays. The ripple effect due to miscalculations may impact other businesses and disrupt their processes.
This metric may involve risks such as weather, traffic, the number of stops, or any other bottlenecks to determine and manage. The following formulas help us understand how this calculation is made at the back end.
How to Calculate the OTIF (On Time, In Full) KPI
The following elements are required to calculate the OTIF:
On-time delivery is the percentage of orders delivered on or before the agreed-upon date between the buyer and the seller. This helps ensure that orders are delivered promptly so that customers remain satisfied.
In–full delivery means orders were delivered in the full quantity as ordered by customers. This ensures the correct and complete amount of goods is delivered, preventing stockouts and short shipments.
Total orders are the number of orders placed during a specific period. This serves as the denominator for calculating this KPI.
You can use the following formula to calculate OTIF:
This formula calculates the percentage of orders delivered on time and in full. It is a comprehensive measure of how well the supply chain is meeting delivery commitments. A high OTIF indicates a well-functioning and reliable supply chain, while a low OTIF percentage suggests areas for improvement in delivery performance.
Tracking OTIF over time helps companies identify trends, and management can address potential issues in time.
2. Cash to Cash Cycle (C2C) Time
As the name suggests, the cash to cash cycle time (or C2C time) is the time in which a company converts its inventory into cash flows from sales. It is also an important KPI to measure because it indicates the efficiency of managing the company’s capital. The C2C cycle should be short. This means that the company can quickly turn its investment back into cash. Moreover, a shorter C2C cycle enhances liquidity and profitability. It enables the company to reinvest in business activities without relying on external financing.
One such example is Amazon which operates with a very short C2C cycle. Due to its high inventory turnover and fast payment collection, it can reinvest in new inventory. This way it can scale operations continuously. This also sheds the light on how important this KPI is for supply chain optimization.
According to a report by Deloitte, the median C2C cycle time for a global company across various industries is approximately 45 days. Companies with a shorter C2C cycle can enhance their profitability by optimizing working capital. For instance, companies like Walmart and Amazon have C2C cycles close to 30 days.
Elements to Calculate the KPI
Days Inventory Outstanding (DIO) is the average number of days a company holds its inventory before selling it.
Days Sales Outstanding (DSO) is the average number of days it takes a company to collect payment from customers after a sale.
Days Payables Outstanding (DPO) is the average number of days a company takes to pay its suppliers after purchasing goods or services. It reflects how well a company manages its payable relationships and cash flow by delaying payments.
The formula for Cash-to-Cash Cycle Time is:
Where, for a year:
DIO = (Average Inventory / Cost of Goods Sold) × 365
DSO = (Average Accounts Receivable / Total Credit Sales) × 365
DPO = (Average Accounts Payable / Cost of Goods Sold) × 365
The calculation of C2C can help you to identify risks of bottlenecks in your supply chain operations management.
3. Supplier On-Time Delivery (OTD)
This KPI measures the suppliers a company works with, like vendors and manufacturers etc. It measures the percentage of orders delivered by suppliers on or before the agreed-upon delivery date/time. Moreover it is also important for establishing effective mitigating strategies in the supply chain.
It is to be noted that even small delays in supplier deliveries can cause production interruptions and inventory shortages. Hence OTD optimizes costly shipments and rush productions by allowing companies to choose the best partners for their operations.
For instance, according to Gartner’s Supply Chain Top 25, 95-98% OTD is the average metric for high-performing global supplies. These are mostly electronics, FMCG and automotive sectors. It can only be possible when you have strong command on this KPI and strong relations with suppliers.
An automotive manufacturer like Toyota, depends on a steady flow of parts from suppliers. It needs to track Supplier On-Time Delivery to ensure that each part arrives on time. In this way it can avoid production delays and meet customer commitments. For instance, a delay in the delivery of car engines could halt an entire assembly line, impacting delivery commitments.
Elements to Calculate the KPI
Total Number of Orders Delivered on Time or before the promised delivery date by the supplier in question.
Total Number of Orders placed with the supplier during a measured period. It is the volume of orders basically that needs to be quantified.
With these two elements, the following formula will be used to determine the OTD percentage:
With the results as a high percentage (e.g., 95% or above), the supplier is reliable, and the company can rely on their deliveries for smooth operations. On the other hand, the result of a low percentage means that there is an issue with suppliers’ operations. In such cases, companies will have to address potential issues to avoid production delays and reduce supply chain challenges.
4. Freight Cost Per Tonne Shipped
Freight Cost Per Tonne Shipped is another crucial KPI to measure the cost of transportation of goods for every item. It refers to the ratio of shipping cost over volume. That is, how much it costs you to ship one tonne of a good.
It is a critical metric from the point of that company’s track because it directly impacts the total cost of goods sold (COGS). (as a side note, to be efficient in this KPI, you might want to look closely at how container shipping works). This KPI also helps you to identify inefficiencies and negotiate at both ends with better rates.
A report by World Bank on global freight costs found that freight coast per tonne shipped is steadily on the rise. This is mainly due to fluctuations in fuel prices, labour shortages, high wages, global inflation, and increased demand for shipping capacity. In some regions, freight costs have increased by as much as 30% year to year. Given the above, it is clear that this KPI is in constant change and is critical for factors such as cost control and the impact of optimizing supply chain profitability.
Elements to Calculate the KPI:
Total Freight Cost is the total amount of money spent on transporting goods during a specific period.
Total Tonne Shipped means the total weight or volume of the goods (in tonnes) shipped during the same measuring period.
The formula for Freight Cost Per Tonne Shipped is:
The result after calculation will determine whether the transportation is efficient (that company is spending less on shipping for more volume) or makes losses through inefficiencies (more cost of transportation against less volume). In either case, this KPI becomes critical to building supply chain resilience. Lower cost per tonne indicates better transportation efficiency, as the company is spending less on shipping relative to the volume of goods transported.
5. Inventory Turnover
Inventory Turnover indicates how often a company sells and replaces its inventory over a specified period of time— usually during the fiscal year. Thus, this KPI indicates the efficiency of inventory management for a given company, which, in turn, speaks to how well it can sell and restock its products in a logistic business. A high inventory turnover rate suggests that a company is selling goods quickly. A low turnover rate, on the contrary, may indicate overstocking, slow sales, or inefficiencies in inventory management, among other possible issues.
This KPI belongs to the set of operational KPIs. Through this metric, you can see how your supply-chain team is managing inventory. Moreover, you can control holding costs, such as storage, warehouse, insurance, and handling.
Since inventory represents a significant investment for many companies, managing turnover ensures that capital is not unnecessarily tied up in unsold goods. For example, a retailer like Walmart closely tracks inventory turnover to ensure products sell quickly and optimize stock levels. A slow-moving product with low turnover may be discounted to clear space for faster-selling items.
Elements to Calculate the KPI
The cost of Goods Sold (COGS) is the direct costs incurred by the company to produce or acquire the goods sold during the period. This includes production costs, raw materials, and freight costs.
Average inventory is the inventory's value on hand during the period. It is usually calculated by adding the beginning and ending inventory values and dividing by two.
The formula for Inventory Turnover is:
A high turnover ratio means efficient inventory management, while a low turnover ratio may indicate slow sales, excess stock, or inefficiencies in inventory management. In this case, you might need to improve demand forecasting or offer promotions to move goods.
6. Customer Order Cycle Time (COCT)
The Customer Order Cycle Time (COCT) measures the total time taken for an end-to-end supply chain. That is, the amount of time it takes from when a customer places an order to when the order is fulfilled and delivered to the customer by you. This KPI is essential to tracking the order fulfilment process. The shorter the COCT, the better and more profitable it will be because it will increase customer satisfaction.
A study by McKinsey & Company found that businesses that improve their order cycle time by just 10% can experience up to a 5% increase in customer satisfaction and 2-3% growth in overall revenue. Companies that consistently deliver orders faster than competitors will likely attract more customers. For example, Amazon strongly emphasizes minimizing COCT by optimizing warehousing, and automation through robots, packaging, and shipping processes
Elements to Calculate the KPI:
Order fulfillment time means the time it takes to pick, pack, and prepare an order for shipment (internal inventory efficiency).
Shipping time means the time required for the order to be shipped and delivered to the customer (performance of shipping method).
The formula for Customer Order Cycle Time is:
A small value means that your company is processing and delivering orders quickly. This will enhance customer satisfaction and reduce costs associated with delayed deliveries. However, longer COCT indicates inefficiencies in order processing or in other processes that may need your attention. So, by tracking COCT metrics, you can pinpoint areas in the order fulfillment process. These will be gaps for better planning, resource allocation, faster delivery, or any bottlenecks. In this way, you can increase customer retention rates and keep your business a competitive position.
7. Perfect Order Delivery Rate (PODR)
Perfect Order Delivery Rate or PODR is another KPI in the supply chain business that you must track in order to keep an efficient operation. This metric tracks the percentage of customers whose orders were delivered correctly, on time, and in perfect condition. A “perfect order” meets all the specified criteria. It includes the right product, quantity, correct delivery address, timely delivery, and no damage. So, you may now see that this KPI comprehensively measures how well a company’s supply chain and order fulfillment process function.
By tracking this KPI you can improve customer satisfaction and build brand loyalty in the market. It will also reveal your supply chain performance by measuring your ability to deliver orders with the highest standard. Moreover, a high PODR reflects a well-managed supply chain where every stage, from order processing to delivery, is executed correctly. All these factors contribute to cost control because any mistake will add additional costs. So, a high PODR helps reduce these costs and improves overall profitability.
Elements to Calculate the KPI:
To calculate the Perfect Order Delivery Rate, the following elements are considered:
On-time delivery, as the name suggests, is the percentage of orders delivered by the agreed-upon date.
Order Accuracy is the percentage of orders shipped with the correct products, quantities, and specifications per the customer’s request.
Damage-free delivery is the percentage of orders that arrive in perfect condition, without damage during transit.
The formula for the Perfect Order Delivery Rate is:
By regularly tracking this KPI, you can improve your order fulfillment process, which will increase customer satisfaction. Once the customers are satisfied, you can scale up and grow above and beyond.
8. Gross Margin Return on Investment (GMROI)
Evaluation of how much gross margin is earned for every dollar invested in inventory is one of the common metrics used in the supply chain industry. It is most commonly known as Gross Margin Return on Investment (GMROI). This KPI is important for understanding how healthy inventory is being utilized to generate profits. So, in short, GMROI helps you assess whether their inventory investment efficiently contributes to their overall gross margin.
Based on this definition, a high GMROI indicates a company is making good returns on its inventory investments. Along with that, it also helps operators gain insights into profitability. By tracking GMROI, a company can identify which products or categories of products are the most profitable and, based on that analysis, it can optimize inventory management by focusing on high-return items.
To understand the standard average, you can take the example of research done by Harvard Business Review. It states that a GMROI of 3.0 or higher is considered excellent which means that you can generate three dollars in gross margin for every dollar spent on inventory. So, retailers and wholesalers need to monitor GMROI closely to determine which products are performing well.
Elements to Calculate the KPI:
Gross Margin refers to the profit generated from sales, excluding direct costs.
Average Inventory Cost means total investment in inventory, which is crucial for evaluating the return on that investment.
The formula for GMROI is:
So, by regularly tracking GMROI, you can assess your inventory strategies. Then, you can prioritize high-return products; this inventory investment will positively affect your profitability.
9. Fill Rate
The fill rate measures the percentage of customer orders completely fulfilled on the first shipment without any backorders or delays. This KPI is essential for evaluating the efficiency of the order fulfillment process. Moreover, this metric indicates the effectiveness of inventory management and the company’s ability to meet customer demand. Thus, a higher fill rate means the company consistently delivers the right products in the right quantities on the first attempt.
According to Supply Chain Quarterly, the industry benchmark for fill rate is typically 95%. However, if you aim for excellence, you must target 98% or higher fill rates. For instance, a consumer electronics company such as L.G. monitors its fill rate to ensure that popular products like smartphones and laptops are available to fulfill customer orders immediately. A lower fill rate on high-demand items could prompt the retailer to adjust its inventory purchasing or forecasting.
Elements to Calculate the KPI:
The total number of orders where all items requested by the customer were delivered without any backorder or partial shipment.
The total number of orders received during a specific period.
The formula for the Fill Rate is:
By tracking the fill rates metric, you can identify areas for improvement in your order fulfillment process. It will reduce costs related to backorders or incomplete deliveries.
The Bottom Line
Key performance indicators (KPIs) are crucial in measuring the efficiency and effectiveness of a company’s supply chain and overall operations. But, as you can see from this artilogistics have become even more complex in recent years. Hence, managing it manually without a tool or assistance becomes challenging. With Desteia, you can manage the KPIs as discussed in this article and optimize your whole supply chain. The data Desteia will provide will help you gain valuable insights into different facets of business performance, from inventory management to customer satisfaction.
Tracking these KPIs will provide a comprehensive view of your company’s operational performance and customer satisfaction. By rigorously monitoring and improving these KPIs, you can optimize your supply chain and achieve even better performance. Moreover, you can reduce overall costs, increase your profitability, and improve customer relationships. Furthermore, you will be able to make informed decisions and identify bottlenecks. Hence, implementing strategies based on all the analyses will help you continuously gain a competitive edge.