Supply Chain: Four Key Performance Indicators

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  • 0:04 Definition of Supply…
  • 1:28 Analysis of a Supply Chain
  • 5:53 Lesson Summary
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Lesson Transcript
Instructor: Danielle Haak

Danielle has a PhD in Natural Resource Sciences and a MSc in Biological Sciences

A supply chain includes all those involved in getting a product designed, produced, and delivered to customers. Businesses want their supply chains to be effective and efficient; key performance indicators analyze this. Keep reading to learn more.

Definition of Supply Chain Management

When Matt started college, he wasn't sure what he wanted to major in. He started by taking a variety of classes to see what he liked and what he naturally excelled at. Eventually, he decided to major in business, and this was prompted by what he had learned about supply chain management. When Matt called home to tell his parents, they both asked the same question: 'What is supply chain management?' Matt was excited to share his new knowledge, so he told them all about it. By the end of the call, they were just as happy about his major as he was. Let's see what kind of insider knowledge Matt had about what supply chain management is all about.

In short, supply chain management is the field responsible for identifying and monitoring the most efficient way to get a product developed and distributed to consumers, while maximizing customer satisfaction and company success. To do this effectively, it's critical for the analyst to understand who comprises the supply chain. A supply chain is the path of organizations involved in moving a product through development, sourcing, production, and logistics to get it delivered to the customer. One company is rarely responsible for all of these steps; rather, many companies work together to get the job done. Keep in mind a supply chain doesn't only refer to the physical movement of products; it also includes the information passed from one piece of the chain to another.

Analysis of a Supply Chain

Now that you know what a supply chain is, how do you think an analyst decides how efficient one is? That's a great question, and there are actually four key performance indicators (KPIs) commonly used in assessing a supply chain:

  1. Storage Space Utilization
  2. Order Fill Rate
  3. On-Time Shipments and Delivery
  4. Perfect Order Metric

Let's look at each of them a little more in depth. Let's first look at storage space utilization. If your company's warehouse was 1,000 cubic meters in size but was only storing 10 cubic meters of product, this would be a terrible use of space. To avoid situations like this, the first KPI, storage space utilization, is applied to ensure money isn't being wasted on unnecessary storage space.

We can look at total storage space currently being used (10 cubic meters in our example) and compare it to the total space available (1,000 cubic meters). This means only 1% of available space is being used. Ideally, this value would be much higher, indicating a company is efficiently using the space they're paying for. The approximate range identified as optimal storage capacity is around 80-85%, as this range allows rapid response to changes in demand.

Now let's look at order fill rate. Our second KPI is called order fill rate, or the percentage of orders that can be filled with on-hand inventory. For example, if a customer orders 100 items but only 30 can be shipped from the inventory at hand, the fill rate is 30%. That's pretty low. The higher the order fill rate, the better the company is at quickly filling orders, thus keeping customers happy. There are different ways this number may be calculated, but the method depends on the industry being analyzed.

Now let's look at on-time shipments and delivery. The third KPI we're learning about is on-time shipments and delivery. Most companies won't be concerned with both shipping and delivery, but luckily they're measured the same way. How? It's simply a comparison between the number of orders that were shipped and delivered by the company's target time to how many orders were ordered. Let's say a customer orders 10 units of product and wants it delivered by March 15th. If 3 units arrive on March 10th, 3 units arrive on March 14th, and the remaining 4 units arrive on March 16th, the on-time delivery rate is 60%, only 6 of the requested 10 units were delivered before the March 15th deadline.

This KPI is important. Think of how upset you'd be if you paid for 2-day shipping on an online purchase and it took 14 days to arrive. You wouldn't be happy, especially if you paid extra for expedited shipping. This is the same idea. For a business that's part of a supply chain, a delayed shipment or delivery may cause a domino effect throughout the rest of the chain. Not only will the end customer be unhappy, but all of the other pieces of the supply chain will also be disrupted.

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