A Guide to Supply Chain Key Performance Indicators (KPIs)

Many people get confused about KPIs or Key Performance Indicators in Logistics and Supply Chain operations. Which ones to use? And how many?

Sadly, it’s not such an easy question to answer. Still, in this article, I will help you evaluate the need for supply chain and logistics KPIs in your organisation, and identify which types of measurement might be most appropriate.

KPIs in Supply Chain – The Basics

As in any business activity, supply chain operations need to focus doggedly on improvement to compete in the marketplace, but how do you know if your supply chain performance is satisfactory or getting better or, god forbid, worsening? That’s where KPIs come in.

What’s a KPI Anyway?

KPI stands for Key Performance Indicator. A KPI is a practical and objective measurement of progress, either:

• Towards a predetermined goal, or
• Against a required standard of performance

It might help to think of a KPI as something like an instrument on a car dashboard—a speedometer, for example.

If you are driving your car and you wish to maintain a speed of 50 KPH, you will use your speedometer to maintain that velocity. You will go a little faster if your speedometer needle drops below 50KPH, or you will slow down if it climbs above the required speed.

You will use a KPI in the same way as your car’s speedometer. The only difference is that typically, you wouldn’t wish to lower performance when a business activity exceeds the required standard.

As a similar and perhaps more accurate example, if your car has a fuel consumption gauge and you use this to try to drive economically, you are using a bona fide KPI.

Why Are KPIs Important?

Using KPIs for performance measurement ensures that you are continuously evaluating your business activity against a static benchmark. That makes fluctuations immediately visible, and if performance moves in the wrong direction, you can quickly respond.

Once a given KPI shows that performance consistently meets or exceeds the required level, you can raise the bar and set a higher target. For this reason, KPIs are essential for any business improvement strategy.

Apart from an internal desire to improve and compete, KPIs play a part in attracting and retaining customers.

That’s especially true in any business where customers tie into agreements or contracts. Service level agreements, in particular, will be monitored through KPIs agreed between an enterprise and its customer, with the possible application of penalties should performance fall below agreed levels.

In short, KPIs provide visibility of business performance and allow objective quantitative and qualitative evaluation. When you align them with business goals, they take away the guesswork and sharpen the focus on improvement.

Another powerful use of KPIs is in the benchmarking of your company’s performance against that of your competitors and industry peers.

Of course, the big challenge in this type of external benchmarking is obtaining the necessary data, since many companies are wary of sharing performance data with potential competitors.

That’s where a benchmarking partner such as Logistics Bureau can be a massive help. To learn more about how we help our clients to measure and compare supply chain performance with other companies, check out our benchmarking service page.

A Couple of KPI Do’s and Don’ts

Of course, your supply chain and logistics KPIs need to be SMART—Specific, Measurable, Achievable, Relevant, and Time-phased—but this may too rudimentary a set of rules to ensure KPIs are useful. Aside from applying the SMART acronym, my basic take on KPIs is this;

1. Don’t have too many! I’ve seen KPI “packs” the size of phone books, and even KPI sets circulated as a monthly magazine… that no one reads. Remember what the K stands for!
2. Make sure they “tie” in with your goals and objectives. Do they directly support those objectives?

Unfortunately, even these most basic standards imply that many of your supply chain KPIs may not be stock-standard ones. However, in Supply Chain, you would generally expect to see the following standard set, along with those that are more specific to your business needs.

• DIF – Delivery in Full
• DOT – Delivery on Time
• DIFOT – Delivery In Full on Time

These are just an example of very typical logistics KPIs that will be an integral part of your supply chain processes (we’ll get to more examples in a minute).

The Importance of Hierarchy

Another reason not to have too many KPIs is the need to apply various levels of detail to each one. Because of this particular necessity, the development of even half a dozen logistics KPIs will ultimately result in two to three times this number in total… at the very least.

Therefore, as you might imagine, an excess of KPIs will soon have your portfolio approaching the volume of that proverbial telephone directory, making it hard to monitor, and act on, the mass of data generated.

Nonetheless, it is essential to have a hierarchy of KPIs. That’s because, as mentioned, the degree of granularity suitable for one management level will either be too general or too detailed for another. But, at the same time, it is not wise to have too many levels in your hierarchy.

The Two-Level Hierarchy

If you wish to keep things as simple as possible, you should find that for logistics performance measurement, two levels (or tiers) of logistics KPIs are enough. For example, you might call the highest level the “primary tier” and the second level the “secondary tier.”

The first-tier KPIs would be the ones monitored at an executive level in your company, and would perhaps include metrics like:

• Logistics costs as a percentage of sales
• Inventory turns
• Total inventory days
• Source-to-deliver cycle time (the time from sourcing raw materials to delivery of finished goods)
• DIFOT

At the secondary level, you would have KPIs that provide more granularity and highlight the causes of fluctuations in tier 1 metrics. Examples of these secondary KPIs could include:

• Warehouse costs as % of sales
• Transportation costs as % of sales
• Finished goods inventory turns
• Raw materials inventory turns
• Inventory obsolescence
• Inventory days by type
• Inbound delivery in full
• Inbound delivery on time
• Outbound delivery in full
• Outbound delivery on time

The Three-Level Hierarchy

A three-tier KPI solution is a little more involved, with the top two tiers comprising end-to-end supply chain metrics, with Tier 2 being more granular than Tier 1. Meanwhile, the third tier can include KPIs that show performance at a functional level, and highlight how each function’s primary activities contribute to end-to-end performance.

Whether you choose a two or three-tier system will depend on the specifics of your company’s business, the company’s size, and other similar factors.

Of course, it’s also possible to add further tiers for even more granularity, but again, the more levels you have, the more complex your KPI solution.

Now let’s get a little more granular in this study of supply chain KPIs, and look at some examples like the perfect order rate, as well as other KPIs you can use to measure supply chain performance.

Supply Chain KPI Examples

It shouldn’t be too difficult to determine which KPIs to select for your multi-function display. However, every company and its supply chain is unique, so the information in this post is not intended to be prescriptive.

Instead, it’s merely a common-sense guide to those supply chain KPIs that can best provide actionable data for general management purposes. I like to stick to my three simple rules:

1. Make them ‘meaningful’
2. Keep them simple
3. Don’t have too many

Need more insight? Well, the chart below illustrates the Level 1 Supply Chain KPIs that I suggested for a company in the past (these are for just one specific industry):

For reference:

Advantage = the top 20% performers in this sector
Parity = the next 30% of organisations
Disadvantage = the lower 50%

The results in the Blue boxes are a ‘sample’ company. Again, just an example of a supply chain KPI dashboard to familiarise you with you concept. Let’s take a look at some common KPIs that we find ourselves using time and time again.

1. Perfect Order

Even if you chose no other KPIs for your supply chain organisation, you’d do well to consider perfect order as an absolute essential. Unlike most of the KPIs we recommend, perfect order is a composite of several elementary metrics.

Perfect order results can help you assess performance and diagnose issues impacting service, costs, and overall supply chain effectiveness.

The components of the perfect order KPI are as follows:

• On-time delivery: A calculation of the percentage of sales orders that arrive on time.
• In full delivery: This KPI tracks the percentage of sales orders that are delivered completely, meaning that the customer receives the correct items, in the right quantities.
• Damage-free delivery: This measurement is sometimes incorporated into the in full KPI, but can just also be a stand-alone metric.
• Accurate documentation: This metric tracks the percentage of sales orders accompanied by accurate documents throughout the process. Documents included in the metric can vary but usually include advance shipment notifications (ASNs), labels, and invoices.

What about DIFOT? Well, DIFOT is another important composite metric that focuses specifically on the delivery aspects of order fulfillment. It is calculated by dividing the number of units/lines/orders delivered on time and in full by the total number of units/lines/orders delivered in a given time period.

This metric provides a focused view of delivery performance by combining two critical aspects of customer service – delivering the complete order (in full) and meeting agreed delivery timeframes (on time). While similar components are included in the Perfect Order metric, DIFOT can be particularly useful for operations wanting to zero in on delivery performance specifically.

As an example of how illuminating the perfect order KPI can be, let’s look briefly at damage-free delivery as an example.

If your company suffers from a low percentage of damage-free deliveries, you can safely assume that service suffers too, since customers are not receiving their orders in full.

In many cases, your distribution operation will incur unwanted costs to manage returns of damaged items and deliver replacements to the customers (not to mention the cost of writing off damaged inventory).

Finally, you have a problem with supply chain effectiveness, since the processes you have in place are ineffective in minimising inventory damages.

Each of the perfect order metrics provides similar insights into service, cost, and supply chain efficiency/effectiveness, which is why perfect order holds premiere position in our top six supply-chain KPIs.

Calculating the Perfect Order

To get to the perfect order percentage, you need to take the percentage of orders delivered on time, the percentage delivered in full, the percentage delivered free of damage, and the percentage accompanied by accurate documentation, and multiply them all together—then multiply the total by 100.

For example, if the on-time percentage is 98%, the in full is 93%, the damage-free is 99%, and the orders with correct documentation is 96%, the calculation will look like this…

0.98 x 0.93 x 0.99 x 0.96 = 0.8661. Multiply that by 100, and you get 86.61% as your perfect order percentage. Now you might notice that given the four separate performance percentages, which all seem very good, the final total for perfect order appears a bit disappointing—but such is the nature of this measurement.

One of the comments we often hear from our consulting clients, is how hard it is to get a high perfect order percentage—and it’s true. However, it’s vital to remember that the objective of KPIs is to drive improvement, not to have measurements that look impressive.

In other words, don’t worry about how difficult it might be to achieve a perfect-order score of 90% or higher. Set a realistic target that’s higher than your organization’s current performance, and shoot for that. If that target should be 80%, to improve upon a current score of 75%, so be it.

2. Fill Rate (Order Fill, Line Fill, Unit Fill)

While fill rate might be one of the components making up your perfect order KPI, it’s not a bad idea to keep track of order fill and line fill as KPIs in their own right, especially if in full performance is not trending above 98%.

Fill rate KPIs allow you to look a little more closely at in full performance. For example:

• Order fill monitors the percentage of orders successfully delivered on the first attempt
• Line fill monitors the percentage of order lines successfully delivered on the first attempt
• Unit fill monitors the percentage of items delivered on the first attempt

Feel free to choose the fill rate KPI that fits best with your operation, or use them all if it makes sense, but remember, the goal is to keep your multi-function display simple.

3. Cash to Cash Cycle Time

When a KPI has the word “cash” twice in its title, you might think it to be a purely financial KPI; but actually, cash to cash cycle time can also tell you about other aspects of supply chain health.

For example, suppose you can see the cycle time reducing. In that case, it’s a good indication that leanness is increasing—moreover, the less time your operating capital spends tied up, the greater your business’ profitability.

Cash-to-cash cycle time also serves as a guide to how well you are utilising your supply chain assets.

Calculate cash-to-cash cycle time by adding the number of days that inventory is on hand to the number of days (on average) that customers take to pay for their orders and deducting the number of days it typically takes for your organization to pay for its purchases.

As an example, if the number of day’s inventory on hand is 40, the number of day’s sales outstanding is 45, and the number of day’s payables outstanding is 30, the calculation would be as follows:

• 40 + 45 = 85 – 30 = 55, meaning your cash-to-cash cycle time is 55 days.

Naturally then, your target to set for the cash-to-cash cycle should be lower than your current cycle time, but you should take care not to let the number of day’s inventory on hand get too low, or you may run into customer service issues. Be aware, too, that suppliers may become a little disgruntled if you try to stretch the number of days’ payables too far.

4. Inventory Days of Supply

This KPI tells you the number of days your inventory would last without replenishment, before running out. The calculation requires the amount of inventory on hand to be divided by the average daily consumption of the same.

How do you calculate inventory days of supply? Here is an example:

• Total number of mobile phones in stock: 2,000
• Average sales in a month: 600
• Average daily sales: 600/30 = 20
• Days of Supply: 2000/20 = 100 days

If you don’t get your estimations right, this KPI will impact your business negatively:

• If your estimations are higher than actual, an ‘out of stock’ situation could arise, leading to customer dissatisfaction, loss of customers, or even customers switching to other brands.
• If your estimations are lower than actual, it could lead to unnecessary and costly inventory replenishment, and in the case of manufacturing, it could result in overproduction.
• If you neglect this KPI altogether, in other words, do not make any estimations at all, it will be tantamount to shooting in the dark. The result could be constant shortages of stock, higher costs of running the business, or both.

Some guidelines for getting more accurate estimations:

1. Take into account cancellations and return of stock.
2. Allow for variations in sales due to seasons, festivals, and/or new trends.
3. Use weekly, monthly, and year-on-year data for your analysis.
4. Identify top products and ensure you have enough stock on hand to meet sudden surges in sales.

Bringing Suppliers on Board

Because there are costs involved in holding inventory—especially safety stock—it is prudent to negotiate optimum times for your suppliers to deliver to you. Once you have certainty that you can speed up replenishment times, you may want to consider lowering your inventory-days-of-supply metric to lower your costs.

The Par Level System

Some warehouse managers prefer to operate according to the ‘par level system‘. This less accurate system involves determining the least amount of stock you need in your warehouse at all times.

When the inventory falls below these ‘par levels’, it is time to order more stock. The levels are determined by how fast the products sell and how long it takes to get them back in stock.

Whatever method you employ, the goal should be to see inventory days of supply coming down, but not to the point where your supply chain becomes vulnerable to demand spikes or production/supplier delays.

5. Customer Order Cycle Time

The customer order cycle time KPI is useful for evaluating customer service and supply chain responsiveness. It measures the number of days between receipt of a purchase order and completion of the customer’s delivery.

Customer order cycle time also helps diagnose issues with the cash-to-cash cycle, particularly if the latter increases over time. For instance, if the cash to cash cycle is lengthening, but the customer order cycle is not, you know that you’ll need to investigate other areas, such as supplier lead times, invoicing times, and accounts payable or receivable.

6. Total Supply Chain Management Cost as Percentage of Sales

If there were an award for “KPI with the longest name,” this one would surely win hands-down. However, despite its lengthy moniker, total supply chain management cost as percentage of sales is one of the most common financial KPIs used by supply chain organisations.

Some companies prefer to track absolute supply chain costs, or costs for a unit of weight or even a sold unit such as a case or pallet. The use of these alternative supply chain cost KPIs is understandable, but for the primary measurement, TSCMC%S (our unofficial abbreviation) will serve as well as any.

If you decide to use this metric as one of your top 6 primary KPIs, be aware that it can sometimes hide increases in absolute costs, especially when markets are performing well. As sales slump during a downturn, the likelihood is high that the percentage metric will swing alarmingly upward. For this reason, it’s wise to track absolute supply chain costs as well as TSCMC%S.

7. Finished Goods Stock Turns (Inventory turnover ratio)

Stock turn rate is a crucial KPI that measures how quickly your inventory is consumed. It is calculated by dividing the annual cost of goods sold by the average month-end finished goods inventory value, including spares and consumables for supply operations.

The calculation can be demonstrated with a simple example: If your company holds $1 million worth of an SKU and consumes $10 million worth of that SKU annually, your stock turn rate would be ten turns per year.

Industry benchmarks for top 20% performers:

• Ambient food and beverage products: 37 turns per year
• Industrial suppliers: 16 turns per year (note: below 6 turns indicates significant problems)

Poor stock turn rates often indicate underlying issues that require investigation, such as:

• Slow-moving stock accumulation
• Extended supply lead times
• Unreliable supplier performance
• Inaccurate forecasting practices

Regular monitoring and improvement of your stock turn rate is essential for maintaining efficient inventory management and healthy cash flow.

8. Supplier Performance (Supply In Full On Time – SIFOT)

This one is often overlooked, but it’s fundamental to getting your Supply Chain running effectively. What percentage of your supplier deliveries is delivered in full (ie. number of orders, lines, or units delivered in full as a percentage of what was ordered)?

Note: For an order covering 10 units each for 10 lines. If for 5 lines you were supplied 9 units of the 10 ordered, and for the other 5 lines you received all 10 units ordered, then – Units = 95 of 100 = 95%, lines = 5 of 10 = 50%, and order = Nil of 1 = 0%. Depending on your industry, you’ll certainly want to be aiming for above 95% here.

Think about it – every time a supplier fails to deliver in full or on time, it creates a ripple effect throughout your entire supply chain. You’re not just dealing with the immediate shortage; you’re potentially facing production delays, disappointed customers, and the administrative headache of managing partial deliveries.

Keep Your Dashboard Simple

The KPIs discussed so far are most suitable for monitoring at the executive level in your organisation, while also being available for staff at all levels to see how your supply chain is performing as a whole.

However, in addition to simplicity, one of the golden rules of KPIs is that each one must be actionable and relevant. In other words, the target audience should comprise people with the physical ability to make changes that will improve the measured performance.

Therefore, while it is, of course, essential for everyone in your business to have visibility of the KPIs discussed above, it’s evident that except for the C-Suite, and your most senior management, the general workforce is unlikely to be able to use them as a basis for action.

KPIs are the metrics you want to look at every day for a helicopter view of your supply chain performance. If you have too many it just gets confusing and people stop trying to decipher them all.

Can you imagine if you had to try and keep an eye on 20 different instruments? It’s the same with KPIs. While you probably can’t get away with three or four, you certainly shouldn’t need 20.

With KPIs, less is definitely more. Keep it simple, tie your KPIs to your business objectives, and make sure everyone from the top down can relate to your most important supply chain metrics.

Need More KPI Knowledge?

While the KPI explanations in this post are very brief, you’ll find a wealth of more detailed information here on the Logistics Bureau blog, as well as on that of our supply chain benchmarking and KPI consulting division, Benchmarking Success.