Supply chain metrics are becoming an increasingly vital part of any operational performance toolbox. Long gone are the days when metrics were only reserved for data scientists and super ‘techy’ individuals who could make computers dance to a tune.
At Tecsys, we have been working with supply chain metrics for more than 35 years, but these last few years we’ve really seen its use become democratized and available to any distribution manager. Therefore, I thought it would be interesting to walk through the four key supply chain metrics that I’d recommend to any warehouse management leader striving to measure the efficiency of your operations.
Key Supply Chain Metrics
1. Cash-to-cash Cycle Time in Days
Also referred to as the cash conversion cycle (CCC), this metric measures your overall end-to-end supply chain performance. The goal of measuring this supply chain metric is to provide a clear picture of the time required for your organization to pay for a raw material or vendor product and get that cash back into your organization by payment from your customer. Your goal should be a shorter cash-to-cash cycle time, but the benchmark is typically 30 to 45 days. Lower cycle times are better for small companies that do not have the cash flow to allow for longer payment periods.
You calculate this metric by the number days of inventory on hand plus the number of days in payables outstanding minus the number of days in receivables outstanding.
- Days of inventory on hand: The inventory on hand divided by the cost of goods sold multiplied by 365.
- Days of payables outstanding: The accounts payable outstanding divided by the cost of goods sold multiplied by 365.
- Days of receivables outstanding: The accounts receivable outstanding divided by the cost of goods sold multiplied by 365.
2. Perfect Order Rate
According to the APQC, this supply chain metric refers to the act of flawlessly taking and fulfilling a customer order — including taking the order correctly, allocating inventory immediately and delivering the product on time with an accurate invoice. It’s a great way to not only measure how well you are serving your customers, but your own operational efficiency. Multiply the following factors and you should be well into the 90% range:
- Percent of orders delivered on time.
- Percent of orders damage free.
- Percent of orders delivered complete.
- Percent of orders delivered to the correct place.
- Percent of orders delivered in the right packaging.
- Percent of orders with the right documentation.
3. Inventory Turns
Next, if you want to dig deeper into the efficiency of your supply chain operations, a good metric to measure is your inventory turns. It’s the number of times you sell your complete inventory in a year, which tells you how well your product planning and fulfillment process is working. To calculate this supply chain metric, divide the cost of goods sold by your average inventory over the last year.
4. Average Order Lead Time
My final key supply chain metric recommendation is to measure your ability to react and fulfill orders from your customers in a timely fashion. Long lead times can equate to loss of sales and unhappy customers. You’ll want to make sure your organization establishes a lead time goal to help you compare and stay on top of your system processes, warehouse and shipping performance. Simply look at your historical data and calculate the average time an order takes from receipt to arrival at the customer. Make sure you regularly review this metric so you can act quickly when any variances are found.
Understanding Your Supply Chain Through Metrics
If you are not measuring any supply chain metrics now, this list might seem daunting. However, I can assure you that the minute you start calculating and analyzing the numbers, very interesting things will happen. In my experience, just beginning to track a couple of supply chain metrics will result in several ‘aha moments’. You will find that even making a few simple changes will move the dial significantly and form the basis of an ongoing improvement cycle.
It’s always said that you can’t improve what you don’t measure so I’d suggest starting with these four supply chain metrics to help turn your operations into an efficiency powerhouse.
