There’s no getting around it: If you want to get ahead in the competitive shipping industry, you have to keep a sharp watch on supply chain KPIs. Leaving things to chance? Well, you’re bound to fall behind and get displaced, causing your supply chain operations to lose their efficiency and your profits to take a nosedive.
The problem, however, lies not in the importance of KPIs but in knowing which ones to prioritize and monitor closely. With so many KPIs to track, it’s easy to get lost. This dilemma can paralyze decision-makers and that’s when inefficiencies start sneaking into your supply chain, taking your profits down with them.
The good news is that we’ve listed down 12 important supply chain KPIs that truly matter. Here’s a quick rundown of what we’ll cover in this guide:
Here are 12 specific KPIs that you should consider measuring to fine-tune operations, reduce costs, delight customers, and stay ahead of the competition.
The cash-to-cash cycle, or cash conversion cycle, is an important supply chain KPI for managing total supply chain costs. It is the time between when a business pays its suppliers and when it receives payments from customers. In other words, it measures the time it takes for a company to convert its investments in inventory and other inputs back into cash through sales.
The cash-to-cash time cycle KPI is necessary for monitoring cash as it comes in and out of the organization. Failure to track this KPI could result in a cash-flow shortage — leaving you incapable of paying your employees or partners.
The cash-to-cash time cycle can be calculated using the following formula:
Cash-to-Cash Time Cycle = (DIO + DSO) – DPO
Where:
Inventory turnover is one of the most critical supply chain metrics that measures how often a business can sell its entire in-stock inventory over a year. This ratio is crucial for evaluating supply chain performance and the effectiveness of inventory management. It lets you analyze annual ordering and planning and determine the business’s ability to drive profits from the items that are for sale.
The last thing you want is a warehouse full of items that never get sold. The inventory turnover KPI can act as a useful guide when you’re deciding what to put on your shelves. Generally speaking, you want to have more items that fly off the shelves in stock at any given point in time.
The inventory turnover ratio is calculated using a simple formula:
Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory
Where:
On-time shipping is a measurement of how often orders arrive on time at their destination. It evaluates the effectiveness of a company’s supply chain process to meet customer expectations regarding the timely delivery of products or services.
A big part of keeping your customers happy is getting your deliveries to them on time. If your shipments are constantly late, you’ll lose business and generate negative reviews.
Calculating on-time delivery is straightforward:
On-Time Delivery (%) = (Number of Orders Delivered on Time / Total Number of Orders) x 100
The order accuracy ratio tells you how often your organization gets customer orders right. It is an important metric used in supply chain processes and operations to measure the precision and correctness of orders fulfilled.
Mistakes sometimes happen. But if your company is consistently pulling the wrong orders and shipping incorrect items to customers, something has to change. Keeping track of order accuracy is one of the most important supply chain management KPIs to follow. The more accurate your orders are, the higher your profits will be.
Here’s how you can calculate order accuracy:
Order Accuracy Ratio = (Number of Accurately Fulfilled Orders / Total Number of Orders Processed) x 100
The return rate ratio is a metric used to measure the efficiency of your supply chain operations in handling returned products or items. A high return rate ratio suggests that a major portion of the items you send out are coming back to you. This could be because of various reasons, like product defects, shipping errors, or misaligned customer expectations.
On the other hand, a low return rate ratio indicates that your supply chain is doing a commendable job of meeting customer demands without a lot of returns. This is a good thing as it shows that your products are meeting customer expectations and arriving in good condition.
The formula is:
Return Rate Ratio = (Number of Returned Items / Total Number of Items Shipped) * 100
Customer order cycle time represents the total time it takes for a customer’s order to move from the point of initiation to delivery. This includes everything from the moment a customer places an order to the moment they receive it.
The faster you can fulfill orders, the happier your customers will be. Shorter cycle times mean quicker delivery which is a big win. Similarly, a shorter cycle time lets you carry less inventory because you can respond quickly to customer orders. This saves costs as you don’t tie up your capital in excess stock.
Here’s how you can calculate customer order cycle time:
Customer Order Cycle Time = (Order Delivery Time – Order Placement Time) / Total Number of Orders Shipped
The perfect order rate measures the percentage of orders that are delivered to customers without any errors or defects. In other words, it quantifies how well a company can fulfill customer orders accurately and on time.
Customers want their orders to arrive on time and in perfect condition. If you mess up their orders, they won’t be happy, and unhappy customers can spell disaster for your business. When you get orders right the first time, you’re less likely to end up with excess inventory or shortages, which can be costly to manage.
The formula is quite straightforward:
Perfect Order Rate (%) = (Number of Perfect Orders / Total Number of Orders) x 100
Demand forecast accuracy evaluates how well a company’s predictions about future product demand align with the actual demand experienced in the marketplace. Put simply, it’s all about how close your estimates are to reality.
Accurate forecasts help you stock just the right amount of inventory. Too much, and you tie up money in unsold goods; too little, and you risk stockouts, unhappy customers, and lost sales. Manufacturers rely on forecasts to plan production schedules efficiently. When demand forecasts are off, it can cause production inefficiencies and waste.
The formula is:
Demand Forecast Accuracy (%) = [(Actual Sales – Forecasted Sales) / Actual Sales] x 100
It assesses how much it costs to move one unit of a product from one location to another. This unit can vary depending on the industry but it’s typically measured per mile, per pallet, per ton, or any other relevant unit of measurement.
Keeping tabs on transportation costs per unit helps you identify areas where you can cut expenses. It also informs your pricing decisions. Monitoring this metric results in more efficient shipping routes, better load optimization, and reduced fuel consumption – all of which contribute to cost savings.
Here’s how you can calculate transportation cost per unit:
Transportation Cost per Unit = Total Transportation Costs / Total Units Transported
This metric quantifies the expenses associated with holding and storing inventory over a specific period. It includes various costs that a business incurs, like warehousing, insurance, depreciation, financing, and opportunity costs. In simple terms, it’s the price a company pays to keep goods in stock.
High carrying costs can indicate that you’re carrying too much inventory. Optimizing your inventory levels helps free up capital and reduces the risk of overstocking. Lower carrying costs improve your cash flow and give you more financial flexibility. It also helps you offer lower prices and better service.
The formula is:
Carrying Cost Of Inventory = (Inventory Holding Cost/Total Inventory Value) x 100
LTIFR measures the frequency at which employees or workers incur injuries or accidents that result in lost workdays or time away from their job duties. It helps organizations understand how often employees are getting hurt to the extent that they can’t return to work immediately.
LTIFR serves as a benchmark for evaluating how well a company is doing in terms of workplace safety. A lower LTIFR indicates a safer work environment. With it, you can identify high-risk areas or activities and implement preventive measures to reduce the likelihood of injuries. Fewer workplace injuries mean fewer disruptions in work schedules which causes improved productivity and reduced absenteeism.
The formula for LTIFR is pretty straightforward:
LTIFR = (Lost-Time Injuries X 1,000,000) / Total Hours Worked
Yard capacity utilization measures how effectively an organization uses its available yard space for the storage and management of trailers, containers, and other assets within its transportation yard or facility. It measures the percentage of the total yard capacity that is currently in use.
Maximizing yard space usage means you’re getting the most out of your existing resources. This could include reducing the need for additional yard space or costly expansion. When your yard isn’t crammed with assets, it’s easier to move around which improves safety and reduces the risk of accidents.
Let’s look at how you can calculate the yard capacity utilization formula:
Yard Capacity Utilization (%) = (Number of Assets / Total Yard Capacity) x 100
To paraphrase President Eisenhower: Battles, campaigns, and even wars throughout history have been won or lost due to logistics. This is especially important to consider when you’re managing a modern supply chain. In such instances, overlooking small details can come back to bite you big.
With that in mind, here are the 10 reasons your company should measure supply chain KPIs and aim to continuously optimize them.
When it comes to shipping, customers today have more options than ever. That being the case, do your best to make sure orders arrive intact and on schedule. Otherwise, your customers will just hop over to your competitors. In the age of Google, they’ll be able to find a substitute right away.
Success isn’t just about making customers happy. You also have to be more efficient than your competitors when moving items from point to point. That way, you can win and keep the top contracts.
Tracking supply chain KPIs is critical for making sure you’re in line with industry standards and expectations. By tracking KPIs, you can make sure you’re working at the same speed and efficiency as your competitors – and hopefully even faster.
Shipping can be very dangerous – especially when you’re moving heavy or cumbersome objects at great speeds. Therefore, managers need to keep a close watch on safety KPIs to control the pace of operations and prevent small mistakes from being overlooked. By doing so, they can mitigate risks and lessen their exposure to lawsuits, penalties, and other fines.
Shipping is also expensive – especially when you’re moving items at scale. Tracking KPIs can help you identify areas of waste, allowing for cost savings over time. In turn, this lets you deliver more value to shareholders, customers, and owners.
KPIs give you up-to-the-minute data on your supply chain activities. This means you can see where your goods are, how they’re moving, and if there are any bottlenecks or delays right when they happen.
KPIs also act as early warning signals. If something’s not going right, you’ll know it. For instance, if a supplier’s delivery times start slipping, KPIs will alert you so you can take action before it gets worse. KPIs aren’t just about the present; they help you follow trends over time. Are your transportation costs gradually increasing? KPIs will flag it, so you can investigate and address it.
KPIs let you set clear expectations for your suppliers. When they know what you’re measuring and what goals to meet, they’re more likely to step up their game. That’s not all. KPIs hold your suppliers accountable. If they’re consistently missing the mark on key metrics, you can have data-backed discussions about how to improve their performance.
Remember, it’s not about pointing fingers; it’s about working together for mutual success. When suppliers and companies collaborate based on KPI insights, it’s a win-win. You both benefit from a smoother, more efficient supply chain.
KPIs serve as early warnings for risks. Whether it’s a natural disaster, political unrest, or supplier issues, KPIs give you a heads-up so you can adapt and minimize disruptions. With KPI data, you can do serious scenario planning. You can model different situations, evaluate potential impacts, and develop strategies to keep your supply chain resilient.
KPIs also help you allocate resources wisely. If a particular area of your supply chain faces high risk, you can allocate extra resources or invest in contingency plans where they’re most needed.
KPIs are all about the data. They provide real, concrete numbers and metrics that reflect the performance of your supply chain. With historical KPI data at your fingertips, you can start making predictions about future trends and potential issues. This lets you plan for what’s coming and adjust your strategies accordingly.
As we mentioned earlier, KPIs act as your early warning system. If a certain metric starts to slip, you’ll catch it right away. This lets you address issues before they become major headaches.
KPIs can help you track and reduce your carbon footprint, identify areas for improvement, and make your supply chain more eco-friendly. KPIs hold your suppliers accountable for their environmental practices too. If they’re part of your sustainability goals, you can use KPIs to ensure they’re meeting your standards.
Through KPI tracking, you can pinpoint areas where waste occurs in your supply chain. Whether it’s excess inventory or inefficient packaging, you can use this data to reduce waste and minimize your environmental impact.
Remember, sustainability often involves adhering to various regulations and standards. KPIs help you monitor your compliance and ensure that your supply chain practices align with sustainability goals and regulations.
Supply chain resilience is about ensuring your supply chain can withstand disruptions and adapt to unexpected changes without missing a beat. KPIs act as your supply chain’s vital signs. They give you real-time insights into the health and performance of various aspects of your supply chain.
For instance, let’s say you notice a sudden increase in lead times for a particular supplier. Without KPIs, you might not catch this until customer orders start getting delayed, potentially damaging your reputation and customer relationships. But with KPIs, you can spot the issue early and take proactive steps, like finding an alternative supplier or adjusting your production schedule.
At Vector, we created an advanced yard management system (YMS) that directly addresses various aspects of your supply chain operations to significantly boost your ability to meet your KPIs. Let’s discuss in detail:
When you measure your supply chain KPIs, you’re empowering yourself to make informed decisions that can transform your supply chain from good to exceptional. You’ll spot bottlenecks before they become disasters, optimize your processes for peak performance, and satisfy your customers like never before.
Vector’s YMS lets you take control like never before. It gives you real-time visibility into your yard operations – effortlessly managing trailer movements, optimizing dock schedules, and enhancing overall efficiency. With Vector, you can turn your yard into a powerhouse that drives your supply chain KPIs in the right direction.
If you’re looking to get started with seamless KPI tracking, Vector can help. Find out how.
This post was written by Justin Reynolds. Justin is a freelance writer who enjoys telling stories about how technology, science, and creativity can help workers be more productive. In his spare time, he likes seeing or playing live music, hiking, and traveling.
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