Every link in an e-commerce supply chain supports the entire process. That's why ensuring efficient supply chain management is essential for your e-commerce company’s success. But how do you determine whether your supply chain is performing well — and where you need to improve?
That’s where supply chain monitoring comes in. Let’s take a quick look at the concept of supply chain performance, its significance and the key performance indicators (KPIs) to track. This will help you increase efficiency and get your products to customers faster, ultimately increasing profitability and customer satisfaction.
Why measure supply chain performance?
Effective supply chain management plays a critical role in business success. It lets you understand cost drivers so you can find areas to achieve savings, improve efficiency and exceed customer expectations by reducing delivery time.
The way you achieve all of that is by measuring supply chain performance. You analyze key metrics like inventory turnover, transportation costs, warehousing expenses, fulfillment cycle time, on-time delivery, lead time, order accuracy and production cycle time to improve efficiency across your entire supply chain. Measuring these supply chain KPIs uncovers inefficiencies and gaps in the supply chain process.
These aren’t just dry metrics — they’re living, breathing numbers that lead directly to increased customer satisfaction. If you measure supply chain performance, you can improve it. If you improve it, customers will get the products they ordered faster, which means more happy customers for you.
KPIs for supply chain performance measurement
While measuring supply chain performance can get complicated quickly, there’s also a critical core of KPIs to pay attention to. A few of them are below.
On-time delivery rate as a KPI for supply chain performance
The on-time delivery rate refers to the percentage of orders you deliver to customers within the promised timeframe. This KPI holds significant importance because it directly affects customer satisfaction and overall business success.
Firstly, a high on-time delivery rate ensures customers receive orders on schedule, making them more likely to become repeat customers and recommend your company to others.
Secondly, a high on-time delivery rate reflects effective supply chain management and streamlined processes. It indicates that the supply chain is well-organized, from order processing to inventory management to transportation, resulting in efficient operations.
Finally, a strong on-time delivery rate contributes to reduced operating costs. Timely deliveries minimize inventory holding costs, reduce the need for expedited shipping and minimize the risk of stockouts or customer penalties.
By tracking and continuously improving the on-time delivery rate, you can proactively identify areas for optimization, such as route planning, demand forecasting and relationships with suppliers and logistics partners.
Inventory turnover ratio as a KPI for supply chain efficiency
The inventory turnover ratio measures the number of times a business sells and replenishes its inventory within a specific period. A high inventory turnover ratio indicates the business is managing inventory effectively, reducing the risk of holding excess stock. This leads to cost savings, as it minimizes storage and carrying costs associated with excess inventory.
A high turnover ratio also indicates effective demand forecasting and inventory management practices. It reflects the ability of the supply chain to accurately anticipate customer demand, preventing stockouts and ensuring timely replenishment.
Additionally, a high inventory turnover ratio can improve cash flow. By reducing the amount of capital tied up in inventory, businesses can allocate resources to other areas, such as product development or marketing initiatives. They also enjoy improved customer satisfaction through product availability, ultimately driving up profitability.
This is the inventory turnover ratio:
Inventory turnover = cost of goods (COG) sold / average value of inventory
Why does the formula use COGS instead of sales? Because businesses typically value inventory at cost. As for average value of inventory, analysts use it to offset the effects of seasonality. They do this by adding the inventory value at the end of one period to the inventory value at the end of the previous period and dividing the result in half.
Order accuracy rate as a KPI for supply chain quality
Order accuracy rate measures the quality of supply chain operations. It represents the percentage of orders fulfilled correctly without errors or discrepancies. A high order accuracy rate is indicative of a well-functioning and efficient supply chain.
Maintaining a high order accuracy rate is crucial for several reasons. When orders are fulfilled accurately, customers receive the correct products in the right quantities and specifications, leading to a positive experience and building trust in the business.
Order accuracy rate also reflect the effectiveness of various supply chain processes, such as order processing, inventory management, and picking and packing. A high rate indicates that these processes are well-designed and executed, minimizing errors and ensuring the right products are shipped to customers.
Additionally, a high order accuracy rate contributes to lower operational costs. When orders are fulfilled accurately, there are fewer returns, replacements or customer complaints. This reduces inefficiencies from rework, extra shipping costs, fixing mistakes and managing customer complaints.
If you monitor and improve your order accuracy rate, you can identify areas for improvement. These could include actions like enhancing quality control measures, providing proper training to staff and implementing technology solutions like new software or automation. This KPI is a reliable metric for evaluating supply chain quality and driving continuous improvement.
Tips for effective supply chain performance measurement
Now that we’ve covered some essential supply chain KPIs, let’s look at some practical tips to measure supply chain performance. If you’re using a contract logistics or third-party logistics (3PL) provider instead of fulfilling orders in-house, you may want to ask that company for this data.
Define clear and relevant KPIs aligned with business objectives
To measure supply chain performance, first define clear and relevant KPIs that align with the overall business objectives. Ensure the chosen KPIs create supply chain visibility. For example, if improving delivery speed is a priority, tracking metrics like on-time delivery, on-time supply or lead time is valuable. Similarly, if optimizing inventory management is a goal, metrics such as inventory turnover or days of supply can be useful. Days of supply is a ratio measuring the average number of days you hold inventory.
It’s essential to choose KPIs that are measurable, meaningful and directly linked to your desired outcomes. Each KPI should have a clear definition and an associated target to strive for. Regularly review and refine the chosen metrics to ensure their continued relevance and effectiveness.
Establish data collection and reporting mechanisms
To effectively measure the performance of your supply chain network, robust data collection and reporting mechanisms are essential.
Implement systems and processes to collect accurate and timely data at various touchpoints within the supply chain. This can include data on order fulfillment, inventory levels, transportation, warehousing and customer satisfaction. Implement technology-driven fulfillment solutions to automate data collection and minimize manual errors.
Next, establish a centralized database or platform to store and organize the collected data. This will facilitate easy access and analysis of the information, enabling meaningful performance measurement.
Implement regular reporting mechanisms to track and analyze the collected data. Develop customized dashboards, reports or visualizations that provide insights into key supply chain performance metrics and trends.
Lastly, ensure data accuracy and integrity by conducting periodic data audits and validation processes. Regularly review and refine data collection and reporting mechanisms to align with evolving business needs and changing market dynamics.
Regularly monitor and analyze performance data
Regularly monitoring and analyzing performance data is key to an effective supply chain strategy. Establish a routine cadence for data analysis, whether it's daily, weekly or monthly, depending on the nature of your business and the metrics being measured. This allows for timely identification of trends, issues and areas of improvement.
Use technology and software tools to streamline data analysis processes. These tools can help consolidate data from various sources, automate calculations and generate visual reports for better understanding and interpretation.
Analyze performance data in the context of your supply chain strategy and goals. Look for patterns, trends and anomalies that could highlight potential risks. Compare current performance against historical data and industry benchmarks to gain insights into the effectiveness of your supply chain operations. Use the data to identify areas that require action. Involve relevant teams or departments in the problem-solving process.
Benchmark against industry standards and best practices
Benchmarking against industry standards and best practices helps you assess your supply chain performance in comparison to peers and identify areas for improvement.
Start by researching and identifying relevant industry standards and best practices for key supply chain processes. This can include metrics like order cycle time, inventory turnover or customer satisfaction ratings. Collect data on your supply chain performance, compare it to industry benchmarks and analyze the gaps. You can get industry benchmarks from market research firms like Gartner and SCORmark. If you use a 3PL, it may also be able to give you industry benchmarks.
Regularly review and update your benchmarking efforts as industry standards and best practices evolve.
Leverage technology for supply chain performance measurement
Measuring supply chain performance is crucial for businesses looking to enhance efficiency, reduce costs and drive customer satisfaction. To unlock the full potential of your supply chain, use technology-driven solutions like automated data collection, advanced analytics and real-time visibility to get accurate measurement and supply chain KPIs.
Want someone to do it for you so you can focus on the parts of your business you love? Consider partnering with a trusted 3PL like Cart.com. Take the first step toward a more efficient supply chain by reaching out to us today.
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