Supply Chain Performance Measurement: How to Measure Performance in Supply Chain Management

From MEMEs to large conglomerates, business success depends on making the right product available to your customer at an appropriate time and price point. A company's supply chain makes this task achievable. So, it is critical to work on and keep improving your supply chain. You can improve a process only when you can measure it. 

This article discusses everything you must know about performance measurement in supply chain management. Stay with us.

What is supply chain performance?

The performance of a supply chain is the efficiency and efficacy of the process in transforming raw materials into goods and services and ensuring customer satisfaction. It comprises all the supply chain steps of a company, such as: 

• Sourcing 
• Manufacturing 
• Warehousing 
• Inventory management 
• Logistics 
• Fulfilment 
• Customer services 

The key factors that a well-performing supply chain touches are: 

• Product costs: The supply chain affects the cost of acquiring the final product by sourcing raw materials at competitive prices, production and finishing costs, and last-mile delivery costs. 
• Delivery timeframe: This is the time it takes for an ordered package to reach the customer after the order is placed. 
• Product quality: This involves every aspect of consistency, reliability, and customer support for the goods and services being ordered. 
• Customer experience: Customer experience comprises a spectrum of touchpoints in a supply chain, including ease of ordering products, payment procedures, invoicing, and post-sales support. 
• Business resilience: An efficient and effective supply chain not only saves costs and delivers improved customer experience, but it also builds a business's resilience to adapt to changing market dynamics.

Importance of measuring performance in the supply chain

The performance of a supply chain is essential for any business because it can affect the following: 

• Cost of acquiring raw materials 
• Manufacturing efficiency 
• Warehousing efficiency 
• Distribution cost 
• Customer experience 
• Financial health 
• Capability to achieve business goals 

Key performance indicators (KPIs) for supply chain

Some of the key performance indicators for the supply chain are: 

• Perfect order rate 

The formula to calculate this KPI is { (number of perfectly fulfilled orders / Total number of fulfilled orders)*100}. The criteria for a perfect order are—accuracy, zero damage and on-time delivery. 

• Supply chain cost ratio 

The cost of a supply chain is the total expenses of shipping, warehousing, labour, and fulfilment. The formula to calculate this KPI is (total supply chain costs / total sales revenue). The lower the ratio value, the better the supply chain performance.   

• Order fill rate 

It is the ratio of the total shipped, fulfilled, or completed orders to the total order in a particular period. This KPI shows the capability of a supply chain to meet all the orders placed. For example, in a specific month, if a company ships only 80 orders out of 100 received, the order fill rate will be 80%. 

• Cash-to-cash cycle (CCC)  

This is the difference between when a company pays its suppliers and when it gets back cash from customers. The formula is { (days of inventory outstanding + days of sales outstanding) - days of payable outstanding}. The lower the value of CCC, the better the efficiency of the supply chain performance. 

• Inventory-to-sales ratio 

The formula is { average inventory/ (total sales - returns)}. It is a key supply chain performance indicator. However, this KPI is effective when compared over a long period. The lower the ratio, the better the capability to convert inventory to sales.   

• Carrying cost of inventory (CCI)

This KPI shows the performance of inventory management in a supply chain. Higher CCI shows opportunities to rationalise and cut operational costs of inventory management. A company should track this KPI weekly, monthly, quarterly and yearly. 

Supply chain performance measurement techniques

Supply Chain performance KPIs are good indicators of specific parts of the entire process. While measuring the performance, 

• Measure the lead time for each supply chain process. A lead time is the duration it takes to complete every supply chain step. 
• Clarity on lead times gives an estimated time to deliver an order. Is this delivery timeline capable of meeting customer expectations? 
• Review supply chain performance if customers expect a shorter delivery timeline than the existing delivery capability. 
• Supply chain performance can be optimised even when the delivery capability matches customers' expectations. Here, you can use KPIs related to inventory management, fulfilment and shipping processes.

Challenges in supply chain performance measurement

Some of the challenges to performance measurement in supply chain management are: 

• Lack of automation in tracking and data collection across supply chain steps. 
• Unanticipated disruption in the supply chain.  
• Lack of reliable forecast on market demand. 
• Issues related to business sustainability. 
• Rising costs of raw materials and supply chain-related services.  

How to improve supply chain performance

• Use business automation techniques and tools to increase visibility across the supply chain. 
• Take data-based decisions and strategies in vendor management, inventory management, and the collection process.
• Build long-term strategic relations with vendors and suppliers to overcome short-term fluctuations and disruptions.