The performance of a supply chain strategy can be measured using various key performance indicators (KPIs), including:
- On-time delivery: This measures the percentage of orders that are delivered to customers on or before the promised delivery date. A high on-time delivery rate indicates that the supply chain strategy is effective in meeting customer expectations and improving customer satisfaction.
- Inventory turnover: This measures the number of times inventory is sold and replaced during a given period. A high inventory turnover rate indicates that the supply chain strategy is effective in managing inventory levels, reducing inventory holding costs, and improving cash flow.
- Lead time: This measures the time it takes to deliver a product or service from the time an order is placed to the time it is delivered to the customer. A shorter lead time indicates that the supply chain strategy is effective in reducing wait times, improving customer satisfaction, and increasing sales.
- Supply chain cost: This measures the total cost of the supply chain, including production, transportation, warehousing, and inventory costs. A lower supply chain cost indicates that the supply chain strategy is effective in reducing costs and improving profitability.
- Product quality: This measures the quality of products delivered to customers. A higher product quality score indicates that the supply chain strategy is effective in ensuring product quality, improving customer satisfaction, and reducing costs associated with product returns and replacements.
- Supplier performance: This measures the performance of suppliers in terms of delivery times, quality, and cost. A higher supplier performance score indicates that the supply chain strategy is effective in managing supplier relationships and reducing supply chain risks.
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In addition to the key performance indicators (KPIs) mentioned above, there are several other performance measures that organizations can use to evaluate the effectiveness of their supply chain strategies. These performance measures can be both external and internal to an organization.
Internal Performance Measures of Supply Chain
Cycle Time or Lead Time
Cycle time or lead time of any business process refers to the end-to-end time of any process. While measuring the efficiency of a supply chain, two important lead times are taken into consideration. These measures are supply chain lead time and order-to-delivery lead time. You have already studied both these types of lead times in the last section.
The efficiency level of the supply chain strategies of the two organizations can be compared with the help of their lead time. For example, suppose A and B are two close competing automobile companies and the supply chain lead time of the organizations is 15 days and 21 days, respectively. From this, you can conclude that company A has a more efficient supply chain.
High inventory levels make organizations incur additional inventory-carrying costs. Therefore, to achieve supply chain efficiency, an organization should maintain just about as much inventory as required. Generally, there are four types of inventory held in the supply chain of an organization.
These are raw materials, work-in-process (including semi-finished and unfinished goods), finished goods, and spare parts. An organization holds different levels of each of these types as they serve different purposes. An efficient supply chain maintains the optimal levels of these four types of inventory. Therefore, as you can see, the efficiency of a supply chain is reflected by the level of inventory it maintains.
Resource Utilisation Level
The supply chain of an organization deploys various types of resources, such as:
- Manufacturing resources (equipment)
- Warehousing resources (storage facilities)
- Logistics resources (cargo carriers)
- Human resource (knowledge, skills, experience, etc.)
- Financial resources (working capital)
External Performance Measures of Supply Chain
The efficiency of a supply chain is reflected by how these resources are utilized to achieve the supply chain objectives, such as minimizing lead time, optimizing inventory levels, and providing the best customer service.
Customer Satisfaction Level
The customer satisfaction level is a subjective factor and it depends upon several indices, such as:
- Delivery lead time: It refers to the period between the placement of an order by a customer and the delivery of the goods to the customer.
- Order fill rate: It refers to the fraction of customer demands met by the available stock.
- Stockout rate: It refers to the fractions of orders canceled due to the unavailability of goods in stock. As you can see, the stock-out rate is complementary to the order-fill rate.
- Backorder level: It refers to the number of orders that are yet to be filled.
- Probability of on-time delivery: It refers to the fraction of orders fulfilled within the promised delivery time.
This measures the percentage of the total market that the organization captures. A higher market share indicates that the supply chain strategy is effective in gaining a competitive advantage and improving the organization’s position in the market.
This measures the performance of the organization’s suppliers in terms of delivery times, quality, and cost. A higher supplier performance score indicates that the supply chain strategy is effective in managing supplier relationships and reducing supply chain risks.
By monitoring these performance measures, organizations can evaluate the effectiveness of their supply chain strategies and make data-driven decisions to improve performance. Additionally, it’s important to regularly review and update performance measures to ensure they remain relevant and aligned with the organization’s goals and objectives.