2020 has been a tough year for supply chains. We’re all dealing with massive shifts in customers and workforces, global responses and shutdowns, and disruptions to partners. To respond appropriately, you’ll need to know your business and how well it is operating.
To help companies manage their current supply chain, we’ve put together a list of 7 of the most crucial supply chain metrics. Learn, track, and grow by creating a deeper understanding of your full chain.
1. Perfect Order Management
Here’s our favorite metric for any supply chain. Perfect order management is how your company defines and tracks your ability to deliver an accurate order on-time and free of damage. You need to get everything in the right box(es), send it to your carrier at the right time, and pack it safely for delivery.
Perfect orders should be the goal of your operations, whether you ship to wholesalers and 3PLs or are trying to get products to the customer. This metric is one of the few on our list that has consistent mathematics for every part of the supply chain.
To calculate your perfect order index:
POI = (percent of orders completed on time) x (percent of orders completed accurately) x (percent of orders delivered on time) x (percent or of orders delivered damage-free) x 100.
A smart goal is to reach 90 or higher because it gives you flexibility with partners or customers to make a mistake but with minimal risk to overall operations. Order accuracy and completion on-time are the easiest for you to manage, so make them a primary focus if your POI is low.
2. Days of Supply
Let’s switch gears for a moment and tackle days of supply (DOS). The DOS is a standard metric that helps you maintain supply chain efficiency by understanding what you have and how soon it’ll be used.
In simple terms, look at inventory on hand and divide it by the average monthly demand for that inventory. Multiply this by 30 days, and you’ll get a ballpark of how many days of supply remaining. DOS targets depend significantly on your industry, but most companies do well by having at least a month’s worth available. Think of DOS as your baseline, where you can understand simple parts of your business and start protecting yourself.
Inside DOS is another crucial metric: monthly demand. A simple DOS calculation, like the one above, looks at average demand. However, you may see significant demand changes in July compared to December for seasonal products. Such fluctuations can make a generalized DOS differ significantly from reality, so many companies will try to predict each month’s demand and calculate DOS accordingly. Let’s look at that prediction and its feedback loop to help you build a more useful tool.
3. Demand Forecast Accuracy
Demand forecast accuracy is a smart metric that shows you how accurately you’re predicting supply chain events. It tracks explicitly the variation between real or actual demand and what you forecasted. Your place in the supply chain will shift forecast locations, whether by channel, overall store movements, or factory level. When you get it right, you’re ordering or producing inventory at the right level to meet demands while maintaining enough of a buffer for spikes.
Knowing the accuracy of your forecasts will help you understand and retune analytics and market trends. This knowledge can be especially useful for managing production. Tracking your accuracy also plays a role in how you manage inventory effectiveness, including carrying costs.
4. Carrying Cost of Inventory
Knowing how much of your working capital ties up with inventory can demonstrate how much you have on hand and if you need to reallocate. The carrying cost of inventory covers this by showing how much you invested in stock and how much it costs you to store it and have it ready to fill orders. Getting this metric right helps companies identify hidden costs for your inventory that isn’t accounted for in your planning.
For example, you might not be accounting for your products’ different storage costs with a 3PL or in an Amazon FBA warehouse. Where item volume or weight may differ enough between products to mean you need to track two different formulae. Final numbers here also cover spoilage and obsolescence.
If you’re managing your warehouse, inventory carrying cost makes it easy to understand how much you’re spending. This also includes if your tech stack like a WMS is automatically tracking all costs associated with inventory. When systems aren’t paying close enough attention, it’s hard for teams to keep numbers correct.
5. Lead/Order Cycle Time
Now, back to some aspects of your orders. Lead time is also called order cycle time, depending on your supply chain team and location in the stream. It measures the time in between when a customer makes an order and when the order is delivered. It’s a reliable measure for how successfully you’re managing inventory and fulfillment, as well as the broader supply chain. You can use it with more active clients and track consecutive orders to see how well you’re responding to their needs.
Lead time can help you determine the amount of inventory you need on hand at any given time and look for weakness in your supply chain. This is because it shows how long you’ve got to replace inventory before another potential order comes in from that client. If you’re struggling with this time, dive deep to see where your supply chain may be struggling.
6. Freight Cost Per Unit Shipped
Most companies look at the cost of their freight to predict overall expenditures. It’s also a metric worth tracking to see where you can improve. You determine it by looking at total freight costs and dividing by the number of units shipped over that period. Try to keep your freight measurements consistent across all categories, and you can gain deeper insights.
This metric is useful for figuring out the best way to get goods to partners and customers, as well as how to bring it into your warehouses. Measure as much as you can and as many aspects as you can. It seems like a simple metric, but getting granular is how you use it to improve operations.
If you compare freight across various modes like less than truckload (LTL) vs. full truckload (FTL), or barge vs. air, you get a better understanding of the overall cost options. You might also discover that restocking is more affordable for you by ocean and FTL. But if you order larger quantities, you may have to expand warehouse-space costs for these goods.
Knowing freight costs can help you best position your business and control spending while meeting customer expectations. As we all know, customer satisfaction is how you keep the lights on today.
7. Customer Satisfaction (NPS)
Finally, your supply chain is nothing without customers, so you’ve got to keep them happy. There are many ways to track customer satisfaction, but one of the most popular is the net promoter score (NPS). The NPS system measures customer experience and predicts overall growth. It asks customers to rate your relationship and how likely they would continue to use your services and recommend you to others.
We like looking at NPS scores because they can still give you an idea of other metrics not on this list, such as shipping accuracy and on-time shipping rates. The higher your NPS, the more likely you are to get the basics right and do extra work to keep supply chain relationships healthy.
Whether you’re in the upper or middle part of the supply chain, consider running two NPS calculations — one for suppliers and the other for customers. It’s a smart metric to use because it can show you if all the other things are working well to deliver an experience that someone is willing to pay for in the future.
Jake Rheude is the Director of Marketing for Red Stag Fulfillment, an eCommerce fulfillment warehouse born out of eCommerce. He has years of experience in eCommerce and business development. In his free time, Jake enjoys reading about business and sharing his own experience with others.