- "If you can't measure it, you can't improve it"
- Design KPIs to inform and drive required change
- Without knowing the true cost, pricing can suffer
- Tracking inventory turnover rate for efficiency
3 min read
Management thinker Peter Drucker famously said,“If you can’t measure it, you can’t improve it.” This couldn’t be more important for manufacturers, wholesalers and distributors today.
With the right key performance indicators, you can understand what’s working in your supply chain, and what’s not. You can find obstacles to efficient distribution and business growth. You can see issues causing frustrations with customers, and the costs that are draining your bottom line.
The challenge is, with so many metrics available to measure, where do you begin?
Here are three essential KPIs to start measuring today for better supply chain management (SCM):
1. Landed Costs
Landed costs are all those little costs associated with importing stock to Australia or New Zealand, such as brokerage fees, logistics fees, freight and shipping costs, insurance, handling fees, import duty, customs tariffs and taxes.
Individually, they can seem insignificant and easy to overlook. But, they are essential to measure if you want to get a true understanding of how much your imported products are costing you to buy.
Without knowing the true cost, including landing costs, you’re at risk of pricing your products too low and not making any profit or, worse, losing money.
For example, if you sold a jacket for $20, which cost you $10 to buy and $5 to ship, your profit is $5.
But if you don’t consider landed costs calculation, you would report your profit on one item as $10 and use this to make future buying and pricing decisions.
Calculating your total landed cost also gives you the opportunity to analyse your supply chain and determine where you could save costs.
2. Inventory Turnover
This metric indicates how quickly you sell your inventory.
Why is inventory turnover important?
Because extra inventory ties up valuable costs, storage and resources. Your goal should always be to get the finished product out of the door quickly and accurately, which means managing lead times and inventory orders effectively.
Understanding your inventory turnover can help you decide the quantity of raw materials or goods to order, which will help you manage your inventory costs and business cash flow.
The higher inventory turnover rate is, the more efficient your supply chain management is.
The formula for inventory turnover is:
Inventory turnover = Cost of goods sold / (0.5 x Opening inventory + 0.5 x Closing inventory)
For example, if you have an inventory turnover of three, then you sell all your inventory three times per year.
3. Perfect Order Rate
Also known as customer fill rate, this supply chain management KPI tells you the percentage of your orders that are shipped in full and on time, out of all your orders.
In other words, this metric indicates the likelihood that you will effectively service your customer demands. The higher your perfect order rate, the more likely your customers are to be satisfied with your service and stay loyal. Customer satisfaction is where you can really build a competitive advantage.
Perfect Order Rate also shows how efficient your production line, distribution centre and business processes are when it comes to getting the final product out of the door.
Your goal for this KPI? Never aim lower than 100%.
The most important thing is not collecting the data, but using it for nimble decision making, as New Zealand kiwifruit Jace Group found out when it switched to MYOB Greentree. The company can easily report across each growing season and variety at the click of a button, and use the information to make strategic decisions for continued growth.
Speak to us to find out how MYOB can help you measure the right metrics to improve your supply chain management.