Maintaining an efficient warehouse means understandingthe importance of your company’s supply chain – the sequence of processes involved in turning a customer’s order into a delivered product, from the procurement of raw materials to shipping and handling. Companies that are successfully doing this know that managing their supply chain and finding inefficiencies and opportunities for optimization is critical to maximizing profit. But how can you measure the performance of your supply chain? Simple: By utilizing supply chain metrics.
For some, just knowing that their supplier, transporter and retailer — common links on the supply chain — are working together is enough to satisfy them. But the importance of an efficient supply chain cannot be underestimated. Companies with well-managed supply chains see a drastically higher total return than other companies, according to AMR Research. The strength of the supply chain has a dramatic effect on more than just the bottom line — issues with the supply chain affect stock prices for publicly traded companies as well.
Because the term “supply chain” means different things to different businesses, not all metrics apply to every supply chain — nor should they be weighted the same way from business to business. Only you know which benchmarks your company needs to hit in order to be successful. That being said, many of the same metrics are used across various industries. Here are the top 15 supply chain metrics your company can employ to measure efficiency.
Related Article: The Ultimate Supply Chain Reference Guide
1. Perfect Order Measurement: Errors can happen anywhere along the supply chain, but perfect order measurement tells you which links in the chain are most problematic. POM can be applied to each stage of the process: Procurement, production, transportation, etc.
2. Cash to Cash Cycle Time: The number of days between paying for the materials needed to manufacture a product and getting paid for that product is the cash to cash cycle time. This represents the amount of time your capital is tied up and can’t be used elsewhere. Subtracting the customer order payment date from the materials payment date equals your cycle time.
3. Carrying Cost of Inventory: The amount it costs to store inventory over a given period of time is the carrying cost of inventory. All the costs associated with inventory storage — labor, freight, insurance, etc. — multiplied by the average inventory value gives you this metric.
4. Demand Forecast: The demand forecast is the estimation of how much product consumers will purchase, using both educated guesses and historical sales data. These estimations can be used to determine future capacity requirements, pricing or even opportunities in new markets. The accuracy of these estimations can be assessed afterwards by using actual sales as a base.
5. Customer Order Cycle Time: This cycle measures how long it takes for a customer to receive a product after placing an order. This is a key component for measuring customer satisfaction. The formula is actual delivery date minus the purchase order creation date.
6. Fill Rate: The fill rate is the percentage of an order that is filled on the first shipment. This metric is important for two reasons: It relates to customer satisfaction (do a large percentage of items take more than one shipment to fill?) and to transportation efficiency, which can be affected if multiple shipments are often needed to fill orders.
7. Supply Chain Cycle Time: If inventory levels were zero, how long would it take to fill a customer order? By adding together the longest times for each stage of the cycle, you can calculate this crucial metric that evaluates the overall state of the supply chain. Stages with the longest lead times can be identified as areas of concern.
8. Inventory Accuracy: Inventory accuracy is a comparison of the items in stock and the items recorded in the database. If the two counts don’t match, there are issues with bookkeeping and data management, which can be fixed by implementing automated inventory control solutions such as barcode or RFID systems.
Related Article: 5 Ways to Use Lean Inventory to Boost Your ROI9. Inventory Days of Supply: This metric is the number of days it would take for inventory to run out, assuming it could not be replenished. By dividing the inventory on hand by the average daily usage, you will know what inventory is excess or obsolete and where your capital can be better spent.
10. Freight Cost per Unit: The cost of freight per item or stock keeping unit (SKU) is the freight cost per unit. Reducing the amount of money spent shipping individual items — by combining orders or finding alternative transportation methods — can drastically affect the bottom line. This metric is calculated by dividing the total freight cost by the number of items included in the shipment.
11. Inventory Turnover: This ratio tells you whether you have issues with overstocking — or, conversely, with inadequate inventory levels to meet demand. An inventory turnover ratio that is low indicates too much spent on holding costs and obsolete inventory taking up shelf space. A high ratio means you may not have sufficient inventory on hand in case there are changes to the market or to customer demand.
12. Days Sales Outstanding: Measuring how quickly a customer’s payment can be collected — and thus, put to use equals the days sales outstanding metric. The formula here is receivables divided by sales, then multiplied by days in the period. Understandably, a low ratio here indicates accounts receivable efficiency in collecting needed revenue.
13. Average Payment Period for Production Materials: This metric is the average time that elapses between the receiving of raw materials and the payment for those materials. The longer the average pay period, the better: It’s best to pay suppliers within a reasonable amount of time, but slow enough to have capital available when necessary.
14. On Time Shipping Rate: The percentage of items ordered by customers that arrive on — or before — the requested ship date is the on time shipping rate. Happy customers are more likely to return and tell others of your prompt services. The rate is calculated by dividing the number of on-time items by total items, then multiplying the result by 100 for a percentage.
15. Rate of Return: Returned orders are going to occur – it is unavoidable. But a breakdown of why items are being returned can help you understand what issues may be causing dissatisfaction and, subsequently, what you can do to reduce the number of returns.
Measuring supply chain performance is essential to improve your business. It is no coincidence that some of the world’s biggest companies are also mainstays on Gartner’s list of the Supply Chain Top 25. Regardless of your long-term goals, you’ll need the support of a lean, efficient and cost-effective supply chain to achieve them — and only through self-evaluation will your company identify and optimize its own weaknesses, turning them into strengths.
What measures does your business take in managing its supply chain? For more information on inventory and warehouse management to improve your supply chain, visit System ID or call 888.648.4452.
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