3 Supply Chain FAQs Answered: The supply chain KPIs you need to know

3 Supply Chain FAQs Answered: The supply chain KPIs you need to know

Suuply Chain KPIs

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

With the increasing frequency of supply chain disruptions, our clients have more questions about their supply chain KPIs. Here are 3 supply chain FAQs, in addition to the top 10 KPIs you need to improve your supply chain health.

1). Why are supply chain metrics important?

In the current economic climate, there is a growing importance to leverage supply chain KPIs in order to improve your bottom line. Yes, crisis followed by inflation would call for this. But supply chain resilience should be considered a long-term strategy beyond the last two years. According to McKinsey, on average, companies can expect to lose 42% of one year’s profits to supply chain disruptions over the course of a decade.

To mitigate these disruptions, supply chain performance needs to be measured regularly. In fact, certain business models, like those with ecommerce accounting needs, should be tracking their supply chain metrics continuously. Tracking the right supply chain metrics allows you to achieve two things: spot inefficiencies to improve customer experience and increase revenue.

2). What supply chain KPIs should you be tracking?

To measure supply chain performance, begin by tracking drivers and KPIs related to production, warehouse and inventory management, shipping, and finally, sales forecasts.

3). What’s the best way to measure supply chain performance?

Sounds like a lot? It is. One way to track supply chain performance more easily is by digitizing it.  Using ERPs like NetSuite coupled with NetSuite accounting services can offer dashboards that allow you to spot supply chain vulnerabilities more easily. See our list below for ten supply chain KPIs and their formulas.

Supply Chain KPIs

Supply Chain 101: The Top 10 Supply Chain KPIs you Should be Tracking

Production KPIs

Average payment period for materials = (materials payables / total cost of materials) x days in period

To improve cash flow, track your average payment period for production materials to find suppliers that have favorable billing terms.

Warehouse & Inventory Management KPIs

Inventory Days of Supply = (average inventory in a month, in dollars / monthly product demand, in dollars) x 30

This supply chain KPI is the number of days to run out of inventory if you weren’t to restock. The sweet spot you’re aiming for is referred to as the “par level”. Or, when your warehouse has enough inventory to satisfy customer demand without tying up too much cash.

Inventory Sales Ratio = inventory dollar amount / sales dollar amount

Inventory Turnover Ratio = cost of goods sold in period / average inventory in a period

You don’t want to be sitting on unsold inventory for too long. The higher the turnover rate, the healthier the company should be, provided you’re hitting the proper margins. Put another way, the higher the turnover the better your cash flow.

Inventory Velocity = opening stock / upcoming period’s sales forecast

Use inventory velocity to optimize inventory levels so you don’t carry too much inventory at one time. Aim for an inventory velocity of 60% to 70%, with up to 80% for fast-moving inventory items.

Gross Margin ROI = gross profit / [(opening inventory in the period – closing inventory in the period) / 2] x 100

Track gross margin ROI for insight into which inventory are your best performers. Or which ones should be bundled with top-sellers in those holiday rush sales.

Shipping KPIs

Fill rate = (1 – [(total items – shipped items) / total items]) x 100

Directly related to customer satisfaction. A customer that gets their order is a happy customer. With our NetSuite accounting services you can get more specific fill rates related to orders, units or lines as needed. Another supply chain metric relating to customer satisfaction:

On-time shipping rate = (number of items delivered on time in a period / total items shipped in the period) x 100

Sales & Cash Forecasts KPIs

We go into more detail in this post about why business owners need to know how to forecast, but, a business that runs out of cash is more likely to fail. Regardless, whether your business is growing or sustaining, improving cash flow is good for business.

Cash-to-cash cycle = receivable days + inventory days – payable days

This measures how long it takes you to get cash from customers once you’ve paid your suppliers. You want to aim for the shortest cash-to-cash cycle you can.

Days Sales Outstanding = (receivables / sales) x number of days in a period

Days sales outstanding (DSO) measures how quickly you receive revenue from your customers. A lower DSO = better cash flow.

Set your business up for long-term success by regularly tracking supply chain metrics and KPIs to meet your customer demand and improve margins. Your bottom line will love you for it.  

Looking for customized ecommerce accounting services or NetSuite bookkeeping? We’ve got you covered. Contact us to learn more.

Subscribe to our newsletter

Your accounting questions answered.

Related reads