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ASCM Insights

The 6 Essential KPIs

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Supply chain professionals understand that key-performance indicators (KPIs) are vital to reaching strategic and tactical objectives. Issues are identified, improvements are made, and goals are more likely to be met. There are dozens of metrics out there, but I suggest taking a more realistic approach and focusing on just six KPIs. Each of these can be automated to at least some extent with enterprise resource planning (ERP) or material requirements planning software:

1. On-time supply is the difference between orders delivered on time and delivered late, divided by the number of total orders. Tracking this KPI helps you understand whether or not a supplier is reliable.

2. Even you aren’t tracking your suppliers’ ability to deliver materials on time, on-time delivery — calculated by shipments delivered on time versus late — may indicate a need to do so. It also can identify possible issues in customer logistics. For many, this is the most important KPI because it speaks to customer satisfaction and can directly affect the bottom line.

3. Downtime in proportion to operating time is the ratio between the time production and supply chain lines are stopped and the time they operate. This ratio is a direct indicator of asset availability for production. The lower the number, the more efficiently your manufacturing equipment is being used. A ratio of 0.5 indicates production lines were stopped half of the time.

4. Productivity in revenue per employee shows areas with the least and greatest return on investment and can be examined on several levels: company, department and even production line. Find this number by dividing all generated revenue by the number of employees.

5. Incoming material quality is the amount of time or money spent repairing a product because of the quality of materials used. This can be examined by supplier, by product category or as a percentage of faulty materials versus good materials.

6. Extra inventory ties up valuable financial and real estate resources, as you want to use your space for production, not for storing extra materials and components. Inventory turnover control is calculated by the number of days materials haven’t moved from warehouse storage to production. The higher the turnover rate, the more efficiently your supply chain is built. The number varies by industry and manufacturer-specific needs, but, as the general rule, turnover should be 30 days or less.

Maximize your KPIs

Many outside factors can influence the efficiency of a supply chain. Still, tracking the performance of an operation with KPIs can be the difference between success and failure. Keep in mind that supply chain metrics by themselves can’t solve ongoing issues; they are roadmaps and compasses, showing whether an operation is moving in the right direction.

Finally, identifying the problem and its cause is just the first step. While many believe that software alone can monitor and track KPIs, it also takes an investment of management time. 

About the Author

Karl Lauri Managing Team Member, MRPeasy

Karl Lauri is the managing team member at MRPeasy, a developer of ERP software for small and mid-sized manufacturers. He may be contacted at karl@mrpeasy.com.

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