How to Select the Supply Chain KPIs That Matter Most

Effectively track and monitor your Supply Chain Operations

This quick read will provide you with the information you need to have the right criteria to choose your most important Supply Chain KPIs, review lessons learned from previous implementations, and identify the most popular KPIs used across different industries today. Overall, the purpose is to give you guidance on selecting or upgrading your KPIs, breaking it down into 5 main Supply Chain areas. 

Today, we can get numerous software and tools that monitor your performance, there are several out-of-the shell tools you could use. However, every industry behaves differently and one metric working well in one sector might not necessarily be tracking the progress of your business strategy. Before using popular metrics to measure performance, analyze the current alignment with your business objectives, ensure the data used is reliable, review the chosen metrics are easy enough to implement and understand your progress, and that you have the tools to quickly adjust and adapt team efforts when necessary. 

What criteria do I use to pick the most important KPIs? 

In an earlier blog , we explored and identified important methodologies required to select, review and improve your Supply Chain Performance by redesigning KPIs. Here we are going to actually show you the calculation for the most important monitoring metrics in Supply Chain, considering it is just very challenging to include everything in one article and for multiple industries. 

I suggest you gather the most critical indicators in your business and industry based on your competitive strategy, linking customer satisfaction and profitability. I have considered the most critical KPIs broken down into the 5 main Supply Chain areas or functions: Procurement, Inventory Management / Warehousing, Demand / Materials Planning, Logistics / Transportation / Distribution, and Customer Service. 

There way too many Key Performance Indicators (KPIs) you can use in Supply Chain, some studies and reports showing even over 30 key indicators you could use. Oracle recently published an article with 73 essential manufacturing metrics to guide your industrial transformation. The truth is having too many indicators means that you might be tracking and pursuing too many objectives at once, sometimes conflicting with each other, and being counterproductive. Before selecting the right measurements and metrics, ensure you carefully analyze the alignment with your business goals and select only a few metrics you can focus on to achieve your targets. 

Below, I have exclusively selected the most effective KPIs used in Supply Chain to manage progress towards operational goals, as well as support the tracking of your key business areas. I recommend to reviewing this summarized list, and keep narrowing it down to choose KPIs that  will make the most sense to your business, based on your Supply Chain structure, and higher relevance towards your organization strategy and objectives. 

Learning from business cases 

Many companies do already have good metrics, but after analyzing information in detail, it is noticeable that some of the KPIs used are outdated, presenting either a weak data source, missing to consider certain factors; or lack of relevance with activities that are congruent with their organization’s strategy and goals. 

Few other companies are simply using an unrealistic benchmark, being too high or too low; in many cases the KPIs used by organizations do not have an actual industry benchmark and use just internal information, but  targets are not compared within their industry or peer companies. 

Lastly, there is another group of companies that is making a great effort to do everything fairly well, but are still struggling to have the process automated and with enough visibility; gathering the data becomes cumbersome with some periodical gaps along the way. 

It is imperative you address these common challenges before you start choosing or upgrading your KPIs. 

How to choose a KPI metric? Guidance in the KPI selection Process 

Before showing you key metrics, it is very important to understand the selection process for choosing the proper KPIs. Ensure your team can avoid ambiguity and agree on identifying the indicators with greater impact to measure and control what is really critical in your business.  

1. Define your #1 objectives in each area: Procurement, Inventory Management / Warehousing, Demand / Materials Planning, Logistics / Transportation / Distribution, and Customer Service. Main goals in each area usually focused on Reduce cost, improve speed, have accuracy, efficiency and service improvement. Your business should have a competitive strategy, and your Supply Chain should support it. 
2. Ensure you have balancing objectives: avoid having conflicting KPIs, competing KPIs in different areas or departments will be counterproductive. Instead, focus on balancing metrics, e.g. a good approach might be focusing your metrics in Service and other benefits will come, such as cost-savings. Understand the relationship among the KPIs you are selecting, and be aware that KPIs drive behavior in an organization. 
3. Choose KPIs that you can use for decision-making. This is the real benefit of having KPIs, you should gather information/data to then take actions, implement solutions that move the KPI in the right direction. Notice KPIs deviation (positive or negative) early enough to stay proactive and take corrective actions, or to understand and acknowledge what initiatives are making a positive impact that you can maintain or do more of. 
4. Choose KPIs you can do a benchmark with. Review where you stand and set a specific target or goal based on industry benchmark. By benchmarking, you will gain an insightful view to set more reasonable objectives and drive performance to competitive levels. 

Supply Chain KPIs Main Categories: 

1. Procurement 

1. Perfect PO rate: Number of orders received without any errors (Total Number of Orders – Number of Error Orders) / Total Number of Orders) * 100.

Errors-free Perfect order include 100%: on-time, in-full, damage-free, with accurate delivery documentation. Benchmarked by MetricHQ a Perfect Order Rate of 90% or above is usually deemed to be excellent in most industries. There are variations of the Perfect order KPI, the 2 most populars are: 

2. PO Delivery on Time: (Number of orders received on-time / Total Number of Orders) * 100. Benchmarked by MetricHQ, a DOT rate of 95% and above is often considered exemplary. This indicates that a company delivers its goods on or before the promised delivery date at least 95 times out of 100. 
3. PO Delivery in Full and On-Time: (Number of orders received on-time and in-full / Total Number of Orders) * 100. 

These 3 KPIs above could be easily broken down by supply category/material rubric or supplier name. The analysis should consider the detailed evaluation of supplier and identification of root cause for delays and recommended actions (e.g. transportation issues, late ship date, late receiving date). 

Other procurement metrics that should be considered,  and depending on your goals to be implemented, include: 

• PO Cycle time: Time from Internal Requisition request date to PO receiving date from vendor, it can be broken down from Vendor response with quote time. The shorter the better.  
• Supplier lead-time: From PO acknowledge shipping date by supplier to receiving date. Also applied to key vendors on Scorecard. 
• Supplier spend: separate per group or supply categories
• Emergency PO rate: ratio of emergency POs/ Total POs in a given period 
• Cost per PO and Cost per Invoice: cost per transaction
• Incoming Material Quality: number of orders received and stopped by quality issues, examined by supplier, product category and percentage of faulty material. The lower or 0, the better. 

2. Customer Service

When looking at the flow of goods and services, this group of indicators are similar to Procurement KPIs, but instead of inbound/receiving from suppliers, we have outbound/shipping to customers,  transit-time and other Supply Chain related metrics analyzed.  

1. Delivery on Time to customer:  (number of on-time deliveries / Total number of deliveries) x 100.  This KPI is one of the most popular metrics in a business. High on-time delivery fosters customer trust and satisfaction. Benchmark of over 95 % is an excellent target. It could be measured on a timeframe, e.g week of the year, instead of a specific date. 

Similar to the Supplier group and KPIs formulas, Customer Service KPIs has two variations that could be used for more precision and higher customer satisfaction, such as: Delivery on-time and In-full, and Perfect order that measures orders delivered on-time, in-full and errors-free. Ideally, the Delivery on-time is included as a priority indicator and then is recommended to incorporate the other two. Keep in mind you are also being evaluated on the other end of the Chain as an exemplary supplier. 

2. Order Cycle-time: Order delivery time – Order placement time (Customer PO acknowledge date). You can group this by type of products or customers, and work to reduce this rate as much as possible. This metric is monitored to provide accurate information to sales, find opportunities to reduce downtime, and provide better and faster service 
3. Customer Order Fill rate: (Total number of orders fulfilled completely / Total number of orders received by customer ) × 100.  By orders fulfilled completely, it assumes no backorder or substitutions. ThisFor example, suppose you received 50 orders last month and managed to successfully fulfill 45 of them. This makes the Fill rate 45 / 50 × 100 = 90%.  This indicator is useful for finished goods or product already in inventory. ISM mentions that fill rates between 85 and 95 percent are typical benchmarks, with high-performing companies exceeding 95 percent. A 100% fill rate is not necessarily ideal because it might suggest excess inventory. 

Other Supply Chain customer service metrics that should be considered, include: 

• Service rate: (Number of orders delivered on time) / (Total orders received by customer) x 100. Similar to the Service rate, but focus on speed and time. The higher the ratio, the better your service rate. A low service rate can indicate potential issues in your supply chain that may need addressing, such as stock outs or delayed delivery times. It can also negatively impact customer loyalty and retention.
• Return Rate: (Total items returned / Total items shipped) x 100 
• Damage-free delivery/Quality Compliance: rate of quality issues on total orders. This should be broken down by issues with the product or during the delivery and managed fairly quickly. 
• Cost of Quality: Total expenses incurred for quality control / Total number of products produced. 

3. Inventory Management 

Inventory management is probably one of the Supply Chain fields that has been highly monitored due to the efficiencies that it brings and the support to meet excellent Operations and Customer/Sales service. Using best practices like JIT (just in time)  and keeping the right Inventory balance has always been challenging due to changes on market conditions. However, optimizing inventories is pivotal to gain competitive advantages, getting predictive response on demands from customers, and taking action on new and obsolete products.

It is for this reason you usually see more KPIs in this group, as an example Oracle has identified up to 33 different KPIs in Inventory Management only. Below I have carefully selected the critical ones to review and pick from.

1. Inventory Turnover ratio: COGS/ [(beginning Inventory – End Inventory ) / 2]  A critical KPI to be included in your arsenal. It measures how many times you sell and replace your entire inventory over any given period. It is also used as an indicator to predict demand. In general, a good inventory turnover ratio is between 5 and 10, which indicates that you sell and restock your inventory every 1-2 months. But the reality is that this benchmark will vary a lot based on your industry.
2. Days Inventory Outstanding: (or on hand): Average Inventory value / COGS x  days (usually 365 days). Average number of days you hold inventory before selling it. Keep in mind your average Inventory value is calculated by taking  (Beg Inventory – End Inventory) / 2.
3. Cast-to-cash Cycle time: Days of Inventory Outstanding + Days of sales outstanding  or Receivable days (avg number of days it takes to collect payment after a sale) – Days of payables outstanding (avg number of days it takes to pay suppliers). It reveals the time it takes your business to pay your suppliers for materials to the time it receives payment from the customer. The shorter the time, the better. If you have a negative cash-to-cash cycle time, you generate positive cash flow, as your customers pay you faster than you pay your suppliers. 
4. Inventory Accuracy: number of counted product stock-keeping units (SKUs) divided by the number of units on record. The Institute for Supply Management affirms that The CAPS Research report indicated an average of 91 percent as a benchmark, with the lowest-performing companies at 67 percent. A similar approach to review inventory efficiency is: 
5. Stockout rate: (number of stockouts / total number of customer orders) x 100. By the total number of customer orders, you should include the total number of orders per SKUs,  and instances where demand was expected.

Other important inventory metrics include: 

• Inventory days of Supply: Number of Inventory units on Hand / Average Daily Usage of Inventory units. It can be considered per SKU. The days of supply represent the number of days your inventory can sustain without restocking and in case of disruptions. Reducing the inventory days of supply can help you minimize the risks of surplus and outdated inventory. If you see that this metric is decreasing, it means that less of your operating capital is tied to inventory (in other words, your business is getting financially leaner). However, too little can provide risks of stock outs and not fulfilling orders on time. 
• Carrying cost of Inventory: Carrying costs are usually 20-30% (usually labor, insurance, warehousing and freight) of the total cost of inventory, but will vary with your industry and business size. Use the following formula when calculating your inventory carrying cost: Inventory Carrying rate x Avg Inventory value 
• Inventory to Sales Ratio: Average Inventory Value / Net Sales. Compare the average value of your inventory for a given period to net sales for that same period. An increase in the ISR may indicate that your investment in inventory is growing quicker than your sales. Or that your sales are decreasing. If the ISR decreases, it could mean that your investment in inventory decreases in relation to sales or that sales are growing. 

4. Warehousing & Distribution – DC/ Warehouse management

Some of the previous KPI mentioned in Inventory Management and Customer Service can also be used in this section to monitor your warehouse operations. Order fill rate, on-time and In-full order, Inventory accuracy, Inventory turns, and Order Cycle-time are good examples to be used here, as well as: 

1. Warehouse capacity utilization:  Current warehouse space occupied / total warehouse space available. 
2. Receiving & Shipping Efficiency: Volume of inventory received / Total number of staff hours. A similar KPI can be used in Shipping efficiency, or put-away efficiency. 
3. Warehousing Costs: Total annual overheads / Total number of products stored. To calculate your warehousing costs, you’ll need to add up your total annual overheads (rental expenses, utilities, insurance, and equipment expenses) and divide by the total number of products stored in that warehouse. You could also calculate your warehouse cost per order:  Total fulfillment cost / Total number of orders. Once you have these numbers, you can compare it with industry standards to determine whether your costs are reasonable, and make adjustments as necessary.
4. Safety Metrics: You can use by calculating it the number of accidents per year.

5. Transportation – inbound and outbound

1. On-time delivery, On-time and In-full, and perfect delivery: all mentioned earlier are good indicators here as well.  A perfect order delivery rate can be set with the company’s own measurable criteria to determine what constitutes a perfect order.
2. Freight cost per unit (shipped): Total freight cost / Number of units shipped during a period. Freight costs included fuel, handling and any surcharges. This supply chain KPI metric can be calculated per mode (rail, sea, truckload, less-than-truckload, small package, air freight, intermodal). Also, you can use Freight Cost Per tonne: Total freight cost / Number of tonnes shipped during a period. These are helpful to understand shipping costs per unit and tonnes and look for shipment consolidation opportunities to reduce costs. 
3. Freight Bill Accuracy: (Number of Correct Freight Bills / Total Freight Bills) * 100. Shipping your inventory items from factory to warehouse (or from warehouse to the customer) is integral to smooth logistics operations, and a slight error can harm your business’ reputation and cash flows.
4. Outbound Freight cost to sales: Total freight shipping-outbound / Net sales. Similarly,  we have Inbound freight cost to sales: Total freight costs inbound / Net Sales. This helps to break down the difference in freight costs for purchases vs freight costs for sales. 
5. Shipping lead-time or Transportation time: this metric can be used to track specific transit-times it takes to deliver to specific customer destinations,  or the transit-time it takes on average to receive a shipment from a supplier. Traffic time: Shipment date – Order receipt date

Overall Supply Chain

By having visibility in each of these 5 key Supply chain areas you have monitoring control of your performance. Additional overview of supply chain management is monitored through efficiency and  costs, normally related to sales: 

Total Supply Chain Costs as % of Sales:  Total Supply Chain costs (Total inventory carrying costs + Total logistics costs + Total procurement costs) / Total Sales. A higher ratio of supply chain costs to sales can indicate that your business spends too much on supply chain management relative to its sales. Here, you need to identify and address areas with inefficiencies in your supply chain operations.

It is also key to monitor Supply Chain Risk, considering various factors that can impact your supply chain operations: geopolitical issues, natural disasters, supplier disruptions, regulatory changes with new laws and regulatory compliance, transportation disruptions (strikes, borders and port congestions/closures). Monitoring this issues, analyzing demand volatility, and creating a plan for each potential outcome is key. 

Summary

In conclusion, selecting and monitoring the right Supply Chain KPIs  is foundational to create  a competitive edge and create operational excellence.   As demonstrated, while numerous metrics exist, focusing on a few well-chosen KPIs tailored to your specific industry and strategic goals can significantly enhance decision-making and operational efficiency. By addressing common pitfalls—such as outdated metrics, unrealistic benchmarks, and lack of data visibility—you can create a more responsive and effective supply chain framework.

The key areas of Supply Chain: Procurement, Inventory Management, Logistics, Customer Service, and overall Supply Chain Risk provide more transparency in the KPI selection process when they are broken down. Emphasizing metrics that drive behaviour and improve performance—such as on-time delivery rates, inventory turnover, and cost efficiencies—will allow your organization to remain competitive and responsive to market demands.

Ultimately, successful KPI implementation requires ongoing review and adjustment to ensure they remain relevant and aligned with your business goals. By continually learning from previous implementations and adapting your approach, you can foster a culture of continuous improvement within your supply chain operations, leading to sustained success and customer satisfaction.

If you are interested in receiving more detailed information or need support to upgrade and implement changes in  your performance monitoring tools, feel free to reach us out at Leanco Consulting.