Every industry, every job, every employee should have them. They provide insight into the health of a company, and guide the measures necessary to make productivity enhancements or chart a new course of action. Key performance indicators (KPIs) are a quick snapshot of the things that matter most to you.
We may all know that benchmarking, whether it be against competitors, company goals or oneself, is important. What you may not know is where to start. What metrics are actually important? How should they be displayed for optimal understanding and who should see them? These are all valid and important questions.
Supply chain management (SCM) is an ideal candidate for using KPIs and developing effective dashboards within the software used to run the business. In SCM, you are focused on precise metrics such as inventory counts, order fulfillment time, assembly time and shipping success.
In order to get a global picture of how the health of the organization is doing, an enterprise resource planning (ERP) solution is often employed. These tools connect all departments within a company such as sales, finance, warehouses and human resources so that information can be easily shared among those who need it. With this type of information connected, you are able to easily tie together data to have useful KPIs and effective dashboards in which to display your data.
When determining what KPIs to use and which ones to group together in a dashboard, you need to consider your audience. Warehouse managers may be concerned with specific metrics, but only for the immediate timeframe, perhaps a week’s worth of historical data, but the vice president of operations probably wants to see monthly, quarterly or even yearly trends. ERP systems typically have built-in role and permission settings to group employees by department or level of exposure that allows you to define who sees what information.
Let’s dive into some of the KPIs a SCM professional may want to look at.
Usually measured on an annual basis, this KPI looks at how many times a year your business is able to sell or turn over its entire inventory. This is especially important when looking at product choices and market demand. You want to ensure that you have the right amount of stock of the products people want at the price they are willing to pay.
Typically, you want to aim for a high turnover rate, as a lower rate usually indicates inefficiency and difficulty turning stock into revenue. However, keep in mind that each industry has different turnover rates. A supplier of fresh produce has a high turnover than a business selling cars or office supplies.
By monitoring the current status and accuracy of orders, you are able make shipping modifications quickly, respond to customer inquiries and react to problems sooner.
Inventory to Sales Ratio
The inventory to sales ratio metric measures the amount of inventory you are carrying compared to the number of sales orders being fulfilled. This is a useful gauge to use when looking at the overall performance of your organization and is a strong indicator of economic conditions. This KPI is closely tied to your inventory turnover.
The backorder rate KPI measures how many orders cannot be filled at the time a customer places them. A high backorder rate means your customers are forced to wait while you replenish your inventory, which negatively affects customer satisfaction. Monitor this KPI to identify why certain items are not in stock and to deal with trends, such as seasonal demand or manufacturing downtimes, that may affect your performance.
Time from Order to Ship
The efficiency of your shop floor is of the utmost concern for many SCM professionals. Knowing that your employees are as productive as possible means a more efficient business. The time it takes from an order to be processed to the moment it is on the truck is a go-to KPI for many managers. Breaking things down even further, for example by employee, helps identify problems that may need addressing or the opportunity to praise an employee for a job well done.
Rate of Return
This KPI measures the rate at which shipped items are returned to you and for what reasons. By breaking down returns, the reasons why items are returned can be identified, trends pinpointed and a reduction in your rate of return ratio can be addressed at the source.
Now that you have an understanding of the type of KPIs you would want to look at, it’s time to put the proverbial pen to paper and determine who in your company may benefit from seeing all the data in easy-to-navigate dashboards, and start using your company’s management tool to start building things out. If you haven’t made the switch over to a tool, not to fear, there are lots of great consulting companies out there willing to lend a hand.