A Performance Metric or Key Performance Indicator (KPI) quantitatively measures an aspect of your business’s performance. It is sometimes said that what gets measured gets managed, so it is important to choose and calculate metrics with intent. Here a 3 very common metrics in supply chain management:
Perfect Order Measurement
Perfect Order Rate = [(Total # orders – # Error orders) / Total # of orders] × 100
This KPI measures the number of errors made in the ordering to invoicing process. These errors can include order processing, warehouse processing, shipping, and invoicing errors. It is important to keep track of errors because correcting them requires avoidable time/costs and creates significant workflow disruptions. Additionally, included among the number of errors are backorders and late deliveries which are not necessarily mistakes but are still considered a performance deficiency. Like processing mistakes, they have costs resulting from customer dissatisfaction.
Inventory Turnover Ratio
Inventory Turnover Ratio = Cost of Goods/ [(Opening Inventory – Closing Inventory) / 2]
This metric measures how fast your inventory is moving. It divides cost of goods sold by average inventory and tells you the number of times a company sells average inventory that is held. The higher the inventory turnover ratio, the faster your inventory is moving and the more efficiently you are using your working capital. A lower turnover ratio may indicate inventory slower moving inventory and higher holding costs.
Fill Rate
Fill Rate = [1 – ((Total Items – Shipped Items) / Total Items)] × 100
Fill Rate is captured in the perfect order rate metric but it is common so you should be aware of it. This ratio indicates the percentage of a customer’s order filled on the first shipment. A low fill rate shows that orders are often not complete and items are back-ordered resulting in waiting and extra shipping costs.
These three metrics are relatively easy to produce and do not need detailed investigation or heavy data manipulation. I prefer higher-level or more generic measures. Not only are narrowly defined metrics harder to produce but they must be carefully aligned with overall business strategy because they may not capture interconnected parts of the business. Focusing on them may create trade-offs with other areas of the business. I’ve experienced cross-functional conflict when a department is too focused on its metrics at the expense of other business goals within the business.
Once you have good alignment of metrics, you have to obtain insight from the data. One data point of a metric gives you limited information. Benchmarking is the process of comparing a metric to add contextual insight and hopefully result in actionable items. A metric can be compared to itself over time to see if performance is improving or it can be compared to industry averages to see if it is competitive with other companies. Remember that while it may be satisfying to beat a target benchmark, do not be complacent. For example, if you are already at the top of your industry, does it beat other industries? If there is a positive trend, can it be magnified? Like all things in business, nothing is ever static.