Which supply chain KPIs matter to executives, operations, and planners?

These supply chain KPIs usually are floor, ceiling, or both. When these metrics violate their limits, they are a sign of a critical issue in the business. These are exceptional metrics where they should never happen. If they do, they should draw management attention to a problem.

For example, you create a policy for when a trailer is on a dock for more than 4 hours. This event triggers immediate review as it cascades to other functions and departments. These are also events that should never happen (for any duration); events and any occurrence are an immediate call to action.

How is your throughput? Is it going up, or is it going down? In a vacuum, these supply chain KPIs are statistics. They might not tell you that your SKU mix has changed, but they give you a place to start looking. These should be created and actively monitored.

The rule of thumb: 3 exceptions in a row, in the same direction, and you should check if a process or the underlying business has changed. If your supply chain metrics have become erratic, moving up and down, out of tolerance… You could have a business process out of control.

For example, high units per hour (UPH) followed by low, then high again, must trigger a review.

These supply chain metrics are related to Productivity but are focused on the bank. Are you profitable? How much? Margin is a good metric to track because a drop in margin should point to the underlying business needing review. Prices could be going down, costs could be going up, or some combination of the same.

For example, if you relied on more temporary labor, there could be a temporary margin hit that should be accounted for.

Any supply chain leaders who keep their eyes on the scoreboard will survive the many unknowns coming their way because they’ll immediately see and feel the impacts as they happen.

Most significant supply chain nightmare: High-level, public issues that impact company growth potential.

• Brand reputation damage. A supply chain issue impacts a product launch and damages confidence in the company.
• Missed growth opportunity. Unable to take advantage of a growth opportunity due to supply chain limitations on scaling, compliance to deliver, or timing of distribution.
• Margin cost implications. An inefficient supply chain erodes margins, impacting revenue.
• Technology failures. Large outage or event impacts the supply chain, causing shipment delays and customer exodus.

Leadership takes a macro-view of the business. Money in, money out, and what is the bottom-line profitability, market target, and customer’s level of “fulfillment”? These individuals focus on longer time horizons – quarters and years – and very rarely drop below monthly views of the business unless there is an existential fire drill.

Profitability KPIs

A more nuanced category than you might think, profitability requires slicing your revenue and expenses up a number of ways to get a complete understanding of cash flow.

• Gross Merchandise Value (GMV): aggregate sale price of goods sold. The higher, the better.
• Shipping Spend as a % of GMV: aggregate cost of delivering goods to customers. The lower, the better.
• Gross Margin: aggregate profit before business expenses. The higher, the better.
• Net Operating Margin: aggregate profit after dedicating administration and overhead. The higher, the better.
• Inventory Holding Costs as % of GMV: effectiveness of buying teams. The lower, the better.

Market Insight KPIs

Focus on the platform- or market-level KPIs. This allows you to look at market trends on a live basis (as opposed to hearing it in the next monthly/quarterly news report).

• Shipping Price Inflation: Carriers often hike rates for holiday seasons and/or have peak-season-based volume surcharges (rate hikes for the 2024 holiday season). This affects the bottom line, which impacts overall profitability. General Rate Increases (GRI) must be absorbed or passed along to customers, which isn’t ideal for anyone.
• Carrier Capacity: Shifts in contract rates are canaries in the coal mine for shipping. If contract rates surge, that means a lot of capacity is being preallocated, and you need to work with your carriers to avoid loads sitting on the docks or costly expedited spot rates.
• Lane Rates: Specific lanes that are rising in price are signals of increased volumes and a need to lock down capacity and lock in rates or risk shocking bills in the form of surcharges. This applies primarily to LTL and FTL, as parcel rates are only adjusted annually.

Fulfillment KPIs

Consider how effective your operations are at delivering on customer expectations.

• Fill Rate: A higher fill rate means meeting customer demands. The accepted definition is orders that are filled on the first pass, within SLA, higher is better up to a point.  Exceeding that often requires spending past the point of profitability. A target of 93% to 98% is considered ideal depending on the industry and clientele. Important to note: SLA is the promise, and Fill Rate is the actual achievement.
• Order Cycle Time: The time between the order being placed and the package leaving the facility, lower is better to a point. Don’t expedite beyond what the customer will pay. A high consistency in cycle time enables Just-in-Time (JIT) inventory practices and reduces overhead.

Most significant supply chain nightmare: Loss of team, customers, or the bottom line.

• Resource shortages and retention challenges. Not enough resources to process the outbound work required to satisfy customers.
• Inefficient operations. Impacts the team’s ability to meet production targets and company financial goals.
• Unmonitored shipping costs. Limited carrier options and processing complexities push shipping costs to a point where they impact the bottom line.
• Customer churn (especially in 3PL). Customers do not receive the level of expected service and choose another provider.

The Operations Team focuses on the processes and facilities that serve customers. Manager roles will usually focus on the scale of weeks to months, looking at concepts from staffing to procurement to execution effectiveness.

• Container Density: How much space do your items occupy to handle distributed order management (DOM) appropriately in each shipping container? Cartonization software makes you highly efficient with fitting your items into your boxes, leading to smaller box sizes and lower shipping costs. A classic concern for shippers and customers is ‘shipping air’ as it shows poor optimization that someone is paying for.
• Allocation Efficiency: A measure of how well orders are being allocated to available ship-from facilities. If this supply chain KPI increases, orders are sent to closer ship-from facilities, thereby decreasing shipping distance and costs. Poor order allocation could be due to a tenant’s existing DOM solution, or lack thereof, to handle multi-channel or multi-location orders appropriately.
• Rate Shopping savings: Display savings in both dollar and delivery day terms. Rate shopping helps tenants reduce their shipping costs while meeting customer demand faster. It reflects the effectiveness of carrier negotiations or aggregator partners in controlling costs.
• Benchmarking: How tenants stack up against the rest of the platform. Some examples of these supply chain metrics include container density and your average shipping cost. As deltas appear, the tenant hones in on improvement opportunities quickly.

Most significant supply chain nightmare: Stockout and Overstock Events

• Inventory visibility. Managing multiple inventory segments without visibility to the entire combined view leads to siloed mismanagement and higher costs, which prevents proactive problem-solving.
• Supplier reliability and visibility. Inability to understand when products will arrive to replenish current stock, causing fulfillment misses and wasted labor.
• Erratic demand forecasting. Products are miscategorized, impacting forecast accuracy and leading to higher carrying costs and more stockout and overstock situations.

Here are some great KPIs for planners to track:

• Lost Sales Margin as % of GMV: Overselling and insufficient inventory during peak season causes companies to lose revenue and customers. Strategic inventory planning can head this off. It is essential to note this is an ‘iceberg’ metric and the most significant concern of diminished customer loyalty – and loss of future sales – is challenging to quantify.
• Overstocked Costs as % of GMV: Overstocking items leads to lower inventory turnover, increasing inventory holding costs due to capital being tied up in existing inventory. It also poses a threat to facility capacity. If allowed to sit, this inventory can move from overstocked to aged to obsolete (discontinued) with a spiraling impact on margins. Learn how demand planning systems can improve forecasting performance.
• ABC Categorization: Categorize each SKU into an A/B/C category based on various metrics (fill rate, sales demand, returns, profitability, etc.). Companies should identify which items are profitable, key drivers for their business, and which items require attention, whether to be replenished, reconsidered, or replaced by new products. Then review on a regular cadence and reclassify as needed. Learn how to improve inventory optimization.

This list of supply chain KPIs is by no means exhaustive, but it should highlight some of the critical items that each leader deals with. Consider where these measures intersect with the 3 “everybody” categories above. Then adopt metrics that are critical to your business to complete the picture.