Inventory Key Performance Indicators

8/6/2019 Inventory Key Performance Indicators

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Inventory Key Performance Indicators (KPI), scorecardand dashboard

You can skip by going straight to the individual resource of KPI : Inventory, Order Fulfillment,Procurement, Outsourcing, Logistics & Transportation, Production, Manufacturing,Supply Chain

Managemt

There is no comprehensive list of KPIs that can be specific to each type of industry. Caution isneeded whenever an organization is identifying its performance measures. Measures driveemployee behavior towards achieving the organizational goals. Organizations must understandthe basic concepts that differentiate scorecards from dashboards and analytics, and KPIs fromother business performance indictors.

Balanced Scorecard

What exactly is it? Developed by Kaplan & Norton in 1996, there are many definitions to it.Primarily, it is:

a strategic planning and management system used to align business activities to the visionand mission statements of an organization. a strategic concept that involves creating a set of measurements from four perspectives -financial goals and performance, customer requirements and success factors, internal businessprocesses and operational excellency, and learning and growth.

These four measurement perspectives must be linked, consistent and mutually reinforcing. Someof specific areas of measurements are:

y Financials - Return On Investment (ROI), Growth Profit Margin, Cashflow, WorkingCapital, inventories costs, inventory turnovers, Sales, etc.

y Customer- Customer service level and satisfaction, retention, acquisition, profitability,market share.

y Internal business process - involves refinement in critical internal processes and valuechain in innovation (how well products are designed to meet customer's needs),operations (materials availability, product quality, process efficiency, utilization, cycletime, costs, forecast errors, excess and obsolescence, scraps), and aftersales service(warranty, repairs, and handling defects and product's returns).

y Learning and Growth - involves in human capital investment (employee retention,training, skills, productivity, morale), systems (critical market information and customer'sneeds gathered by sales and marketing, that help company to strategize and plan forfuture product design and as well as other segments of business opportunities), andorganizational capabilities (R&D, technologies, market responsiveness, talentedmanagerial depth).

Scorecards and dashboards are always used interchangeably, but each brings a different set ofcapabilities. The sources of the confusion are:

Both represent a way to track results. Both use traffic lights, dials, sliders and other visual aids. Both have targets, thresholds and alert messages. Both provide linkage or drill down to other metrics and reports.

The difference comes from the context in how they are applied. Scorecards are intended to bestrategic. Dashboards are primarily for data visualization; they display what is happening during atime period. Most organizations begin with identifying what they are already measuring andconstruct a dashboard dial from there. However, dashboards do not communicate why something


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matters. In contrast, a scorecard does provide the information lacking in dashboards. A scorecardadditionally answers questions by providing deeper analysis, drill-down capabilities, traffic lightalert messaging, and forecasting for inferences of performance potential to determinemotivational targets. Scorecards do not start with the existing data, but rather they begin withidentifying what strategic projects to complete and core processes to improve and excel in. Theselection and validation of the correct or best KPIs is a constant debate.

Here are some guidelines for understanding the differences:

Scorecards chart progress toward strategic objectives. A scorecard displaysperiodic snapshots of performance associated with an organizations strategic objectives andplans. It measures organizational activity at a summary level against pre-defined targets to see ifperformance is within acceptable ranges. Its selection of KPIs helps executives communicatestrategy to employees and focuses users on the highest priority projects, initiatives, actions andtasks required to execute plans.

There are two key distinctions of scorecards: (1) Each KPI must require a predefined targetmeasure; (2) KPIs should be comprised of both project-based KPIs (e.g., milestones, progresspercentage of completion) and process-based KPIs (e.g., percent on-time delivery againstcustomer promise dates).

Dashboards monitor and measure processes. A dashboard, on the other hand, isoperational and reports information typically more frequently than scorecards and usually withmeasures.2 Each dashboard measure is reported with little regard to its relationship to otherdashboard measures. Dashboard measures do not directly reflect the context of strategicobjectives.

Key Performance Indicators are quantifiable measurements, agreed to beforehand, that reflectthe critical success factors of an organization. KPIs are long-term considerations. The definition ofwhat they are and how they are measured do not change often. The goals for a particular KeyPerformance Indicator may change as the organization's goals change, or as it gets closer toachieving a goal. It is also important to define the Key Performance Indicators and stay with thesame definition from year to year. For examples, will sales be recorded for the KPI at list price orat the actual sales price? Do you take inventory value at different periods of the months andsometimes with different costs when calculating inventory turns?

Goals SettingHere are some guidelines on how you should go about setting goals. First, make sure youunderstand exactly what it is your measuring. What drives this measure? What causes failure?Where do you need improvement? Once you can answer these questions, you're in a betterposition to set your goals. Benchmarking is one other way to set your goals. Also, you shouldpractice SMART goals which are:

y Specific: Provide enough detail so that there is no question on what is being measured

and no question how the metric is calculated. You should be specific as to themeasurement, goals and responsible people/department.

y Measurable: Here is where you use your metric. Make sure you have a reliable systemin place that will accurately measure your performance.

y Attainable: Will the Supply Chain projects you have scheduled for the year produceresults that will achieve your goal? The person setting the goal and the personresponsible for achieving the goal should agree with the target. If results are un-attainable or unrealistic, they will have a de-motivating effect on your employees.


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y Realistic: Don't plan to do things if you are unlikely to follow through. Better to plan onlya few things and be successful rather than many things and be unsuccessful. YourSupply Chain goals should be challenging, but realistic in relation to the improvementprojects you have in place.

y Time frame: Identify when your targeting to hit your goal.

Below is a list of the commonly used KPIs and the subset of formulas for managing inventory,measuring inventory productivity, evaluating operational efficiencies, profits and growth.

Cost of Goods Sold(COGS)

= (Beginning Inventory + Net Purchases) - End Inventory

* COGS is an income statement figure which reflects the cost of obtaining raw materialsand producing finished goods that are sold to consumers.

Average Inventory =Sum of each period's Beginning stock + Sum of

each last period's Ending stockNumber of of periods

Inventory Turnover =

Cost of Goods Sold during the past 12months

Average Inventory at Cost during the past 12months

A ratio showing how many times a company's inventory is sold andreplaced over a period.

Gross Profit Margin(GM)

=(Sales Revenue - Cost of Goods Sold)

Sales RevenueGross margins reveal how much a company earns taking into consideration the costs that itincurs for producing its products and/or services, and is expressed as a percentage. Grossmargin is a good indication of how profitable a company is at the most fundamental level.Companies with higher gross margins will have more money left over to spend on otherbusiness operations, such as research and development or marketing.

Gross Margin Return On Investment = (GM% x sales turnover) / (1 - markup %)

Gross Margin Return On Inventory =[(Unit Selling Price of an Item - Unit Cost ofan Item) X Annual Demand for the item] /

Average Inventory Cost of the product

Weeks of Inventory (WOI) =

Ending InventoryBalance

Average weekly sales for a given period oftime

Days of Inventory (DOI) =

Ending Inventorybalance(Average weekly sales for a given periodof time) x 7

or alternatively,


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Days of Inventory (DOI) =COGS/ 365 days (it gives you the numberof days of stock on-hand)

Weeks of Inventory (WOI) =COGS/ 52 weeks (it gives you the numberof weeks of stock on-hand)

Months of Inventory (WOI) = WOI/4.33some call it Inventory Months ofSupply

or alternatively, =Inventory On Hand / Average MonthlyUsage

Sell through % =units sold / (units sold + on hand

inventory)

Stock Sales Ratio =Beginning of month $ Stock / Sales for

period

BTP Shrinkage =Difference between book and physical

inventory

Table 12.1 below shows the several inventory KPI measurements over a period of 12 months. Acompany I went for an interview told me that his business unit was tied down with too muchinventory dollars of more than $64 millions and they were experiencing a poor inventory turnoverof less than 6.0 turns compared to 16 turns the supply chain was well-performing a few yearsago. I made out a plan to help the supply chain to improve the inventory turnover in a steadilyprogressive manner from 5.0 turns to 16.0 turns, measuring from May-2008 up to April-2009.Together with the goal of inventory turnovers are also the plan to improve sales forecastaccuracy, to lower the cost of goods sold while at the same time ensuring customer service levelsare met continually without risk of stockout, to improve target gross profit margin, to reduce DOI

(Days of inventory) and overall average inventory dollars cumulative saving.

Assuming time is into year 2009 and actual data are available for measuring inventorymanagement performance. A considerable improvement in inventory turnover from 4.2 turns inMay-08 to 16.2 turns in Apr-09 equate to a huge reduction in actual inventory of $50,740,000, orin another word, 81.5% of actual inventory dollars cumulative saving. Over the 12 months periodit had also freed up $50.7 millions dollars in cash for the other important businesses. In terms ofDOI, it also translates into a reduction in the average days of inventory on-hand from 73 days to22.8 days. Even with a small 0.3 turns improvement from May-08 to July-08 had resulted in areduction in average days of inventory on-hand from 73 days to 52.1 days, from the initial capitaloutlay of $64.24 millions in May-07 beginning inventory level. It was able to free up nearly 10million dollars ($9.93 M) for other business investment over just a 3-months period. It is notenough to re-emphasize the power of maximizing inventory turns as you can see there were also

simultaneous improvement efforts made in other areas of inventory control - beginninginventories, net purchases, ending inventories, cost of goods sold, month-over-month inventory $cumulative saving.

With tightened control on purchasing which had reduced excess and surplus purchases, reducedsafety stock level, or reduced the min. and max-order-quantities buying for the slow-usagematerials, getting suppliers improved in supply lead time, and hence the costs of goods sold wereable to reduce steadily over the measuring period. The lower COGS that was maintained with thedifferent planning strategies, coupled with thje steadily increasing growth in sales revenue over


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the period, together had contributed to the higher gross profit margin from 2% to 36% over the 12months.

For any level and list of inventory items, this inventory scorecard can be applied to differentproduct lines, multi-location warehouses, different material classes and material categories,existing Service Level Agreement programs, and also for manufacturing site that has production

plan with built-to-stock model.

DOWNLOAD this worksheet example as shown in Table 12.1.

Month TargetInventory

Turns

ActualInventory

Turns

SalesForecast$ ('000)

SalesActual $

('000)

BeginningInventory$ ('000)

PurchaseReceipts$ ('000)

EndingInventory$ ('000)

COGS $('000)

ForecastedGross

Margin %

ActualGrossMargin

%

AverageInventoryOn Hand$ ('000)

AverageInventory

CumulativeSavings $

('000)

ActualInventory

CumulativeSavings $

('000)

AverageInventory

Cumulative% Saving

ActualInventory

Cumulative% Saving

May-08 5 4.2 23,500 22,460 64,240 19,940 62,220 21,960 7% 2% 62,743 - - - -

Jun-08 6 4.3 22,882 21,545 60,937 17,890 57,852 20,975 8% 3% 58,535 4,208 4,368 6.7% 7.0%

Jul-08 7 4.5 22,900 21,960 55,372 16,930 52,285 20,017 13% 9% 53,379 9,364 9,935 14.9% 16.0%

Aug-08 8 5.3 20,874 22,990 53,020 16,580 48,220 21,380 -2% 7% 48,408 14,335 14,000 22.8% 22.5%

Sep-08 9 5.6 21,325 22,786 50,045 16,230 45,000 21,275 0% 7% 45,589 17,154 17,220 27.3% 27.7%

Oct-08 10 6.8 21,845 23,980 46,864 15,900 39,934 22,830 -5% 5% 40,288 22,455 22,286 35.8% 35.8%

Nov-08 11 7.4 22,542 23,800 40,980 15,360 34,680 21,660 4% 9% 35,124 27,619 27,540 44.0% 44.3%

Dec-08 12 8.4 22,980 23,720 36,076 14,755 29,835 20,996 9% 11% 29,994 32,749 32,385 52.2% 52.0%

Jan-09 13 9.5 23,230 23,540 30,758 14,040 24,900 19,898 14% 15% 25,134 37,609 37,320 59.9% 60.0%

Feb-09 14 12.7 23,250 23,765 24,456 13,725 18,529 19,652 15% 17% 18,569 44,174 43,691 70.4% 70.2%

Mar-09 15 14.1 23,845 24,980 17,489 13,020 14,000 16,509 31% 34% 14,050 48,693 48,220 77.6% 77.5%

Apr-09 16 16.2 23,930 24,248 14,950 12,080 11,480 15,550 35% 36% 11,519 51,224 50,740 81.6% 81.5%

Table 12.1 Planning inventory investment through measuring inventory turnovers, cumulative saving and Gros(monthly)


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Figure 12.1 Measuring monthly Inventory Turns


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Figure 12.2 Measuring Cost of Goods Sold and Gross Profit Margin

Figure 12.3 Measuring monthly cumulative inventory dollars saving

The following is an good example of a dashboard that you can use to effectively track, measure,and evaluate the various categories of the inventory against predefined goals on a weekly basisinstead of once every month which are normally too late to react to problems and

underperforming results. It evaluates the three levels of inventories - accessible inventory, WIPinventory and the restricted inventory. It also includes the planning and purchasing areas ofresponsibilities which evaluate the many important issues on inventory productivity andoperational efficiencies, and the KPIs in the last section including Customers Service Level,Inventory Turns, Gross Profit Margin and so on. When your organization has the monthly goalson inventory turns, gross profit margin and other KPIs, this weekly dashboard will allow you totimely track and evaluate all the underperforming KPIs before it becoming too late to do anythingtowards the end of the months.


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Over-shipment value would have to be excluded from the inventory total value because that is theextra stock shipped out without being captured in the computer system. The units ofmeasurement are in multiple of million $, percentage and number. The frequency of evaluatingthe performance is weekly and monthly for some KPI. The "traffic lights" color-coding symbols areused to measure the weekly performance status. I have developed an Excel VBA macro (genericenough and no hardcode) to automatically color-code the status in the column "Trend" so thatmanagers don't need to waste unnecessary time on putting in the color symbols but they can usetheir valuable time to go through the misperformance with the various stakeholders. You caneasily easily develop an Workbook_SheetBeforeDoubleClick Change Event code so that whenyou double-click on any of the performance measurement indicator (ie. any cell in second columnunder header "Measurement"), it will bring out the detailed worksheets where the differentprocess owners had reviewed and based their weekly results on. To include such Analyticsmacro will save you much time because you can quickly and effectively go through the causesand effects analysis with the respective stakeholders. Ask all the stakeholders to save theiranalysis files in a single designated shared directory with specified subfolder names. This way itis a lot easier for you simply to assign a Constant to the designated directory path. If you need myhelp on writing the code for the analytics, you can write to me. Further down below is the syntaxfor this dashboard.

You can DOWNLOAD this dashboard worksheet as shown below which also has the code in VBModule.

Green - Meet or exceed goal $m : in million $

Red - Controls are not active and/or not meeting goal W : Weekly measurement

Yellow - Controls active, trending to goal for 2 consecutive periods M : Monthly measurement

Informational purposes only #: number of timesFeb-

08Measurement OwnerExecute Unit Frequency Goal

or

Max

Trend week18

week19

InventoryLevels

Accessible Inventory :

Unrestricted stock on-hand william Y $m W 9.000 10.63410.642

VMI location william Y $m W 0.750 0.853 0.768

Reserve stock william Y $m W 0.200 0.134 0.134

Inbound stock in-transit within 30days william Y $m W 0.450 0.563 0.663

Inbound stock in-transit >30days william Y $m W 0.000 0.243 0.326

QI checking william Y $m W 0.180 0.216 0.216

WIP (parts, sub-assembly & finished goods):

Front end william N $m W

Assembly william N $m W

Testing william N $m W

Packaging william N $m W

Inaccessible Inventory :

QI Rejects/ MRB location william Y $m W 0.020 0.162 0.037Obsolete materials william Y $m W 0.020 0.154 0.034

Rework/repair materials with vendors william Y $m W 0.100 0.137 0.137

Sales Returns (DOA) william Y $m W 0.020 0.036 0.017


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Field warranty parts returns william Y $m W 0.050 0.068 0.083

Over-shipment william Y $m W 0.010 0.239 0.239

Under-shipment william Y $m W 0.200 0.483 0.483

Inventory level Total: $m W 10.99 13.68 13.54

Purchasing

Excess stock without Safety Stock level & open demand william Y $m W 0.000 0.236 0.236Surplus stock without open demand william Y $m W 0.020 0.034 0.029

Excess open Purchase Orders - Class A material william Y $m W 0.010 0.019 0.022

Excess open Purchase Orders - Class B and below material william Y $m W 0.010 0.025 0.019

Excess open Purchase Requisitions william Y $m W 0.015 0.033 0.029

Excess inbound in-transit william N $m W 0.000 0.023 0.034

PO (Delivery Priority 01) without firm demand - aging >30 days william Y % W 2.00% 4.50% 6.20%

PO (other Delivery Priorities) without firm demand - aging >30 days william Y % W 4.00% 13.3% 8.25%

Open PO (Delivery Priority 01) with demand, without ETA william Y % W 0.00% 2.47% 1.05%

Open PO with >60 days Leadtime aging william Y % W 0.00% 8.36% 8.74%

Open PO with 30-60 days Leadtime aging william Y % W 5.00% 10.5% 13.7%

PO Executed > 7 Days williamY

% W 20.0% 56.4% 43.7%Purchase Requisition Backlog >7 Days (less Exceptions) william Y % W 25.0% 46.7% 53.9%

Top 25 Critical parts stockout william Y % W 0.00% 8.64% 5.46%

Stockout bins for "Super-Fast" category moving materials william Y % W 0.00% 3.35% 2.04%

Stockout bins for "Fast" category moving materials william Y % W 2.00% 5.96% 3.54%

Stockout bins for "Medium-Fast" category moving materials william Y % W 4.00% 5.36% 4.27%


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Below I give you a long list of the various Performance Indicators that are commonly used andsome are the standard measurements being used across the various industries. You can studythem, and decide how your people are going to effectively collect and munching raw data, settingcriteria, automate analysis, and implement control plan before you want to include them in yourprocess dashboard in addition to the KPIs I have shown you in table above. I segment them bythe various business unit functions - Inventory, Order Fulfillment, Supply Chain, Procurement,Manufacturing, Production, Outsourcing, Shipping.

InventoryInventory is a list for goods and materials, or those goods and materials themselves, heldavailable in stock by a business. Inventory are held in order to manage and hide from thecustomer the fact that supply delay is longer than delivery delay, and also to ease the effect ofimperfections in the manufacturing process that lower production efficiencies if productioncapacity stands idle for lack of materials.

Inventory Service LevelService Level KPI is to measure the level of service performed by Inventory or Stock Control infulfilling their customer (user) requirement. It is reflected by the percentage of quantity or valuefulfilled toward total quantity or value requested (demand) during the period of reporting.

Independent Demand RatioFor manufacturers that also supply replacement parts and consumables this metric helps todefine the % mix of demand for an item from independent (outside sources) vs dependent (insidesources). The ratio is calculated by dividing the unit usage for customer orders by the total unitusage of the item from all sources (work orders, sales samples, destructive testing, inventoryadjustments, etc.).

Early Receipts to MRP Date (required date)Early receipts to MRP date - This is a measure on your Planning efficiencies. Some planners orwarehouse personnel may request that the material be brought in long before the plant/operatorsneed the parts. Reasons for doing so may be quality, lead time variance, buffer stock etc. Earlyreceipts to MRP produce higher levels of inventory that are not required yet. In a way, this is atthe other end of the scale than JIT. Measure: MRP due date vs Receive to Dock (stores) date.

Early POReceipts to PODue DateEarly receipts to PO date - This is a measure on your suppliers and their diligence to supply perthe contract date. Early receipts to PO produce unexpected deliveries turning up, congestedgoods inwards and of course higher that projected inventory levels. Measure: PO due date vsReceive to Dock (stores) date.

Inventory Lead TimeLead time is the length of time it takes to obtain inventory from suppliers.

Inventory AccuracyMost Advanced Planning Systems calculate net inventory requirements. If the book inventoryused as the basis for these calculations has a high error, the net inventory requirementsgenerated will not reflect the true inventory needs. The inventory error should be factored into the


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safety stock calculation to protect service levels from variance in inventory due to inventory countaccuracy.

Assertive continuous improvement programs should be in place to support a decrease ininventory count errors.The formula is: (book inventory - counted inventory)/book inventory

Average Age of inventoryThe (average) age of each product in stock. For example, product received in Jan, but remainsuntil Aug.

Unit Cost PerBatchUnit Cost per batch = (Cost/Quantity) for each batchPrimarily used in FIFO (First In First Out) Method

Assumes an inventory of non-unique goods (that is, every one is similar to every other one)Generally preferred inventory valuation method. Assumes inventory is sold in the order that it isstocked, with the oldest goods sold first and the newest goods sold last. Uses the unit cost perbatch of acquired/produced goods, and counts the inventory backwards from the newest batch.

Inventory ValueInventory Value = Average Unit Cost x Units of Current Inventory

Inventory Carrying CostIt is measure by Inventory Carrying Rate X Average Inventory Value. [See this example ]

Inventory Carrying Rate - can be explained by the example below.

1. Add up the annual Inventory Costs. Example:

$800k = Storage$400k = Handling$600k = Obsolescence$800k = Damage$600k = Administrative$200k = Loss (pilferage etc)$3,400k = Total

2. Divide the Inventory Costs by the Average Inventory Value (assuming $34,000k).Example:

$3,400k / $34,000k = 10%

3. Add up other costs. Example:

9% = Opportunity Cost of Capital (the return you could reasonably expect if youused the money elsewhere)4% = Insurance6% = Taxes19% = Total


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4. Add up percentages:

10% + 19% = 29% which is yourInventory Carrying Rate

5. Inventory Carrying Cost = Inventory Carrying Rate X Average Inventory Value

29% X $34,000,000 = $9,860,000

GMROI (Gross Margin Return on Inventory)GMROI =[(Unit Selling Price of an Item - Unit Cost of an Item) X Annual Demand for the item] /

Average Inventory Cost of the product.

Note that Unit Inventory Value tells you what it costs you to make the product. The Unit SellingPrice - Unit Inventory Value tells you the Margin.

Stock CoverStock cover is the length of time that inventory will last if current usage continues.

Obsolescence forRaw Material, WIP, and Finished Goods InventoryInventory reserves taken due to obsolescence and scrap and includes products exceeding the shelf life, i.e.spoils and is no good for use in its original purpose (do not include reserves taken for Field Service Parts).

Field Service Parts ObsolescenceReserves taken due to obsolescence and scrap. Field Service Parts are those inventory kept at locationusually outside Manufacturing plant i.e., distribution center or warehouse.

Order FulfillmentFill Rates (OrderFill Rate, Line Item Fill Rate, Unit Item Fill Rate)It calculates the service level between 2 parties and is a measurement of shipping performanceexpressed as a percentage of the total order. It calculates the amount of order lines shipped onthe initial shipment versus the amount of lines ordered, and has to take into consideration therequested delivery date.

OrderFill Rate orService LevelIt is measured as Orders filled/Orders Requested. The percentage of your deliveries to customerdelivered in full (ie. number of orders, lines, or units delivered in full divided by the total number of

orders customer requested). For example: 5 lines (=10 units) not delivered in full from one orderof 10 lines (=200 units) = 0% Order Service Level.

Line-Item Fill RateTotal Line items filled / Total Lines shipped in time per order per period. For example: 5 lines (=10units) not delivered in full from one order of 10 lines (=200 units) = 50% Line-Fill Service Level.


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Unit-Item Fill RateTotal Units items filled / Total Units shipped in time per order per period. For example: 5 lines(=10 units) not delivered in full from one order of 10 lines (=200 units) = 95% Unit-Fill ServiceLevel.

Lines Late to Promise

Lines shipped after promised ship date

Lines Late to ScheduleLines shipped after scheduled ship date

OrderFulfillment Cycle TimeOrder Fulfillment Cycle Time is a continuous measurement defined as the amount of time fromcustomer authorization of a sales order to the customer receipt of product.

Customer order Promised Cycle TimeThe anticipated or agreed upon cycle time of a Purchase Order. It is gap between the PurchaseOrder Creation Date and the Requested Delivery Date. This tells you the cycle time that you

should expect (NOT the actual).

Number of deliveries with past due goods issue dateNumber of Deliveries where the Goods Issue date (date it should leave the premises to reachcustomer on time based on transit time) is equal to or less than todays date.

Perfect OrderMeasure / FulfillmentThe error-free rate of each stage of an order. Error rates are captured at each stage (order entry,picking, delivery, shipped without damage, invoiced correctly) and multiplied together.

% ofBackordersThe number (or percentage) of unfulfilled orders. A backorderis an unfilled customer order, or

demand (immediate or past due) against an item whose current stock level is insufficient tosatisfy demand. Can also measure Aged Backorders which are backorders in past-due timebuckets based on the Requested Delivery Date/Requested Ship Date.

Net Booked Order ValueValue of booked order lines less the value of booked return lines for the sale of products but not services.

Past Due Schedule LinesNumber of booked order lines with past due scheduled ship date.

Past Due Schedule ValueValue of open order lines with past due scheduled ship date.

Sell Through %It refers to the percentage of the inventory received from factory or distribution depot that isactually sold to the consumer.Percentage of units sold during a period = units sold / (units sold + on hand inventory).This can also be described as Units sold divided by Beginning Inventory Qty.

On-Time Ship Rate


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What percent of orders where shipped on or before the requested ship date. On time ship ratecan be calculated on a line item, SKU, case or value basis.

Supply chain

Days Inventory Outstanding (DIO)It measures cash investment tied up in inventory that will impact Working Capital. A decrease isan improvement, an increase a deterioration. DIO is closely tie with Inventory Turns metric. DIO isgenerally good if Inventory Turns numbers are increasing.

DIO = Inventory / (Net Sales / 365)

Note:Many companies use Cost of Goods Sold instead of Net Sales when calculating DPO and DIO.

Days Sales Outstanding (DSO)Sellers want to shorten their cash conversion cycle by measuring DSO. It measures the averagenumber of days that a company takes to collect revenue after a sale has been made. A low DSOnumber means that it takes a company fewer days to collect its accounts receivable. A high DSOnumber shows that a company is selling its product to customers on credit and taking longer tocollect money. Thus, a decrease in DSO represents an improvement, an increase adeterioration.

DSO = Account Receivables / (Net Sales / 365)

Days Payable Outstanding (DPO)It measures the total time it takes a business to pay back its creditors. Buyers want to delaypayment for as long possible by extending DPO. DPO = Account Payables / (Net Sales /365)

Days Working Capital (DWC)Days of Working Capital (or the overall cash conversion cycle ) is the average number of days afirm takes to convert working capital into sales revenue. The fewer the number of days, the moreefficient the use of working capital. Thus, the lower the number of days, the better. DWC = (

Account Receivables + Inventory Days Payable Outstanding) / (Net Sales / 365)

% of time spent picking back ordersNumber of hours spent on picking back orders as a percentage of working hours.

Sales order by FTEThis indicator measures the number of customer orders that are processed by full time

employees per day. This helps evaluate the workforce cost per order.

Scrap value %Scrap value as a percentage of production value.

Manufacturing Schedule AdherenceManufacturing Schedule Adherence = (|Scheduled Production - Actual Production|)/Scheduled

Production.which is the absolute variance of actual production to scheduled production.


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When manufacturing over or under produces against plan, either service level or inventoryinvestment is adversely affected.

Assertive continuous improvement programs should be in place to decrease the variance.

Inventory AccuracyMost Advanced Planning Systems calculate net inventory requirements. If the book inventory

used as the basis for these calculations has a high error, the net inventory requirementsgenerated will not reflect the true inventory needs. The inventory error should be factored into thesafety stock calculation to protect service levels from variance in inventory due to inventory countaccuracy.

Assertive continuous improvement programs should be in place to support a decrease ininventory count errors. Formula is:

(book inventory - counted inventory)/book inventory

Inventory Carrying CostsInventory Carrying Cost = Inventory Carrying Rate X Average Inventory Value [see above ]

Inventory Carrying Rate

This can best be explained by the example below. 1. Add up your annual Inventory Costs:Example: $800k = Storage, $400k = Handling, $600k = Obsolescence, $800k = Damage, $600k= Administrative, $200k = Loss (pilferage etc), and $3,400k Total

1. Divide the Inventory Costs by the Average Inventory Value: Example: $3,400k / $34,000k =10%2. Add up your: 9% = Opportunity Cost of Capital (the return you could reasonably expect if youused the money elsewhere) 4% = Insurance 6% = Taxes 19%3. Add your percentages: 10% + 19% = 29% Your Inventory Carrying Rate = 29%

Direct Product CostSum of costs associated with manufacturing a specific product.

Direct LaborCostSum of costs associated with payment of employees, insurances, taxes, etc.

Direct Material CostSum of costs associated with acquisition of raw material and support material.

Cost of goods sold (COGS)Cost of Goods Sold includes all expenses directly associated with the production of goods orservices the company sells (such as material, labor, overhead, and depreciation).

Cost of managing processes

Periodic costs of managing processes, usually based on the number of FTEs involved inmanagement functions for processes.

Total Supply Chain Management CostTotal Supply Chain Management Cost is a discrete measurement defined as the fixed andoperational costs associated with the Plan, Source, Make, and Deliver supply chain processes.


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Time needed to recruit/hire/train additional laborAmount of time required to achieve a certain substantial improvement concerning the number ofemployees.

Missed Deliveries perMillion (MPM)Measures supplier on time delivery by part reference ordered using the same logic as the quality

measure PPM.Several missed categories are defined such as ; Missing part reference, under-shipped, over-shipped, delivery window missed etc.(Total number of missed deliveries / Total number of part references ordered) x 1,000,000

Delivery Schedule Adherence (DSA)Delivery Schedule adherence (DSA) is a business metric used to calculate the timeliness ofdeliveries from suppliers. Delivery schedule adherence is calculated by dividing the number of ontime deliveries in a period by the total number of deliveries made. The result is then multiplied by100 and expressed as a percentage.

Manufacturing Cycle TimeMeasured from the Firm Planned Order until the final production is reported. It usually takes into

account the original planned production quantity verses the actual production quantity.

Inventory Replenishment Cycle TimeMeasure of the Manufacturing Cycle Time plus the time included to deploy the product to theappropriate distribution center.

Cash To Cash Cycle TimeThe number of days between paying for raw materials and getting paid for the product by thecustomer.

Upside Supply Chain FlexibilityUpside Supply Chain Flexibility is a discrete measurement defined as the amount of time it takes

a supply chain to respond to an unplanned 20% increase in demand without service or costpenalty.

ProcurementProcurement refers to the overall process of acquiring a product or service. Depending on the

circumstances, it may include some or all of the following: identifying a need, specifying therequirements to fulfill the need, identifying potential suppliers, soliciting bids and proposals,evaluating bids and proposals, awarding contracts or purchase orders, tracking progress andensuring compliance, taking delivery, inspecting and inventorying the deliverable, and paying thesupplier.

Procurement spend per procurement employeeAverage procurement spend per procurement employee (in FTE).


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% of suppliers that are responsible for 80% of spend Percentage of suppliers that are responsible for 80% of spend on these suppliers.

Number of non-conformities during vendor inspectionSuppliers defect rate can be calculated by dividing number of defective items by the total numberof items purchased (or the number of shipments with defects by the total number of shipments).

This KPI measures the quality of purchases made, or in another way, to measure theperformance of different vendors.

Requisition to item issuance timeTo measure the delay between the time when a procurement request is initiated and the timewhen the request is fulfilled (expressed in terms of days).

Travel & entertainment costs as % of gross marginTravel and entertainment costs as a percentage of gross margin.

% of (preferred) suppliers not used in last 12 monthsPercentage of (preferred) suppliers not used in last 12 months (or any other given period).

% ofOn-Time SupplierDeliveries.Percentage of procurement requests satisfied by the preferred supplier list.

% ofSupplierDeliveries in Full (Line-Fill and Unit-Fill)The percentage of your supplier deliveries is delivered in full (ie. number of orders, lines, or unitsdelivered in full divided by the total number of supplier orders.) An example: 5 lines (=10 units)not delivered in full from one order of 10 lines (=200 units) = 0%OrderService Level, 50 %Line-Fill Service Level and 95% Unit-Fill ServiceLevel.

Proportion of purchases made from contracts/frameworksProportion/percentage of purchases made from contracts/frameworks.

% of payable invoices without purchase orderPercentage of payable invoices that have not been matched to a purchase order.

Total negotiated cost reduction savingsTotal negotiated cost reduction savings during the procurement process within the measurementperiod.

Value ofSupplier Idea ImplementationAdvanced procurement organizations actively solicit ideas from suppliers for cost savings,revenue growth, and the like. They track these ideas and measure the contribution to theorganization's bottom line. This KPI measures how well the procurement department leverages

the intellect in the supply base.

Procurement Cycle TimeThe average time it takes between requisition submission and purchase order placement is onemeasure of procurement cycle time. Another type of procurement cycle time that can bemeasured is the time it takes from the beginning of a sourcing process to the time that a contractis signed.


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Travel & entertainment costs as % of increased revenueTravel and entertainment costs as a percentage of increased revenue from new orders and sales.To understand whether a business is gaining true value from its investment in travel.

% ofRFPs that needed to be improved based on supplier responsesPercentage of Request for Proposals (RFP) that needed to be improved based on supplier

responses.

Average number of responses received to RFPsAverage number of responses received to Request for Proposals (RFP).

Average size of discounts of itemsAverage size of discounts in procurement of items.

Outsourcing% Actual vs. Estimated SavingsPercentage of actual or realized savings on spend against a negotiated contract vs the estimatedspend determined during the sourcing initiative.

% of time sheets in need of correction/validationPercentage of time sheets in need of correction and/or validation by submitter.

Vendor/client quality calibration variance

Vendor/client calibration variance identifies the difference between client and vendor qualityscoring, is calculated as (VendorQualityResult - ClientQualityResult) / ClientQualityResult.

% of vendor services delivered without agreed service targetsPercentage of vendor services delivered without agreed service targets.

% of (major) suppliers subject to monitoringPercentage of (major) suppliers subject to monitoring.

% ofuser complaints due to contracted servicesPercentage of user complaints on contracted services as a percentage of all user complaints.

% of invoices disputedPercentage of invoices disputed.

Number of formal disputes with suppliersNumber of formal disputes with suppliers

% of key stakeholders satisfied with suppliersPercentage of key stakeholders satisfied with their suppliers.


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Logistics & Transportation

Freight cost perunit shippedCalculated by dividing total freight costs by number of units shipped per period. Useful inbusinesses where units of measure are standard (e.g., pounds). Can also be calculated by mode(barge, rail, ocean, truckload, less-than-truckload, small package, air freight, intermodal, etc.)

Outbound freight costs as percentage of net salesCalculated by dividing outbound freight costs by net sales. Most accounting systems canseparate "freight in" and "freight out." Percentage can vary with sales mix, but is an excellentindicator of the transportation financial performance.

Inbound freight costs as percentage of purchasesCalculated by dividing inbound freight costs by purchase dollars. It is important to understand theunderlying detail. The measurement can vary widely, depending on whether raw materials arepurchased on a delivered, prepaid, or collect basis.

Transit timeMeasured by the number of days (or hours) from the time a shipment leaves your facility to thetime it arrives at the customer's location. Often measured against a standard transit time quotedby the carrier for each traffic lane. Unless you are integrated into your customers' systems, youwill have to rely on freight carriers to report their own performance. This is often an importantcomponent of lead time. Transit times can vary substantially, based on freight mode and carriersystems.

Claims as % of freight costsCalculated by dividing total loss and damage claims by total freight costs. Generally measured in

total and for each carrier. A high number generally indicates packaging problems, or processproblems at the carrier.

Freight bill accuracyCalculated by dividing the number of error-free freight bills by the totalnumber of freight bills in the period. Errors can include incorrect pricing, incorrect weights,incomplete information, etc. Generally measured in total and for each carrier. Formula is:[number of error-free freight bills] / [total number of freight bills]

Accessorials as percent of total freightCalculated by dividing accessorial and surcharges by total freight expenditures for the period.Many freight carriers will charge extra fees for trailer detention/demurrage, re-delivery, fuelincreases, and other expenses or extra services. Often, these are extra costs incurred due to

inefficient processes.

Percent of truckload capacity utilizedGenerally used for shipments over 10,000 lbs. Calculated by dividing the total pounds shipped bythe theoretical maximum. For example, assume your trucks can hold 40,000 lbs. of product.During the prior month, there were 675 shipments totaling 22.95MM lbs. The percentageutilization was 85%. The 15% unused capacity is an opportunity for more efficiency.


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Mode selection vs. optimalThis is calculated by dividing the number of shipments sent via the optimal mode by the totalnumber of shipments for the period. To measure this, each traffic lane must have a designatedoptimal mode, based on freight costs and customer service requirements.

Truck turnaround time

This is calculated by measuring the average time elapsed between a truck's arrival at your facilityand its departure. This is an indicator of the efficiency of your lot and dock door space, receivingprocesses, and shipping processes. This also directly affects freight carrier profits on yourbusiness.

Shipment visibility/traceability percentCalculated by dividing the total number of shipments via carriers with order tracking systems, bythe total number of shipments sent during a period. This is an indicator of the relativesophistication of your carrier base, and one measure of the non-price value available from yourcarrier base.

Number of carriers per mode

Calculated by counting the total number of freight carriers used in a given period, by mode(ocean, barge, rail, intermodal, truckload, LTL, small package, etc.). This is an indication of yourvolume leverage and control over the transportation function.

On-time pickupsCalculated by dividing the number of pick-ups made on-time (by the freight carrier) by the totalnumber of shipments in a period. This is an indication of freight carrier performance, and carriers'affect on your shipping operations and customer service.

Fill RateCalculates the service level between 2 parties, is a measure of shipping performance expressedas a percentage of the total order. It measures the amount of order lines shipped on the initialshipment versus the amount of lines ordered. This measure has to take into consideration the

requested delivery date (except if the receiving party does not accept early shipments).

On-time delivery - value %On-time value rate: value of order lines shipped on-time / total value of the order.

On-time delivery - line countOn-time line count: amount of order lines shipped on-time relative to the amount of lines ordered.

Internal cycle time Receipt of material to GRN/MRREfficiency in warehouse operations hinge on quick turn around of activities and ensuring visibilityof material tracking by creating Goods receipt note or material receipt report timely in system.

Number of deliveries with past due goods issue dateNumber of Deliveries where the Goods Issue date (date it should leave the premises to reachcustomer on time based on transit time) is equal to or less than todays date.

% ofundamaged goods after shipping/transportationPercentage of undamaged goods after shipping/transportation.

Average time of import or export transactionAverage time needed to process and complete an import or export transaction.


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Empty milesPercentage of miles (trips) that carried no inventory/freight.

Shrinkage ValueThe costs associated with breakage, pilferage, and deterioration of inventories. Usually pertains

to the loss of material through handling damage, theft, or neglect.

ProductionScrap value %

Scrap value as a percentage of production value.

Manufacturing cycle timeMeasured from the Firm Planned Order until the final production is reported. It usually takes intoaccount the original planned production quantity verses the actual production quantity.

Defects PerMillion Opportunities (DPMO)DPMO is a Six Sigma calculation used to indicate the amount of defects in a process per onemillion process opportunities.

DPMO = Total Number of Defects / Total Number of Process Opportunities for a Defect) x1,000,000

DefectsPerOpportunities (DPO)

DPO = Total Number of Defects / Total Number of Process Opportunities for a Defect

Process Yield (%)Formula is: (100 - defects percentage)%

Average production costs of itemsAverage production costs of items produced within measurement period.

Mean-Time Between Failure (MTBF)The average time between equipment failures over a given period i.e. the average time a devicewill function before failing. It is the reliability rating indicating the expected failure rate ofequipment. It is the reliability rating indicating the expected failure rate of equipment. More isbetter.

Mean Time To Repair (MTTR)Average time (e.g. in hours) between the delivery of an assembly, SKU for Finished Goods outfor repair and its resolution.

Finished product cycle timeAverage time associated with finalizing activities, such as: package, stock, etc.


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Schedule production activities cycle timeAverage time associated with scheduling the production activities.

ManufacturingUtilizationUtilization is the measurement ratio of the Actual Production Output to its Design Capacity, thatis required to produce one unit of output. In reality the line cannot be run continuously at itsmaximum Design Capacity because of the need for line maintenance, changeover, stoppages,loading, etc. What remains, after such loss times are accounted for, are called the EffectiveCapacity.

Utilization = Actual Output/Design Capacity

EfficiencyEfficiency is the ratio of the Actual Production Output achieved to its Effective Capacity.

Efficiency = Actual Output/Effective Capacity

Equipment qualityEquipment quality = Good Pieces / Total Pieces

Equipment performanceEquipment performance = Ideal Cycle Time / (Operating Time / Total Pieces) or,Equipment performance = (Total Pieces / Operating Time) / Ideal Run Rate

Equipment availabilityEquipment availability = Operating Time / Planned Production Time

Overall Equipment Effectiveness (OEE)Overall Equipment Effectiveness (OEE) = Availability x Performance x Quality

Availability = Operating Time / Planned Production TimePerformance = Ideal Cycle Time / (Operating Time / Total Pieces)

or,Performance = (Total Pieces / Operating Time) / Ideal Run RateQuality = Good Pieces / Total Pieces

Manufacturing Schedule Adherence (MSA)Manufacturing Schedule Adherence =(|Scheduled Production - Actual Production|)/ScheduledProduction. The absolute variance of actual production to scheduled production.When manufacturing over or under produces against plan, either service level or inventoryinvestment is adversely affected.

Assertive continuous improvement programs should be in place to decrease the variance.

Manufacturing cycle timeMeasured from the Firm Planned Order until the final production is reported. It usually takes intoaccount the original planned production quantity verses the actual production quantity.


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Takt TimeIn simple words, Takt Time is the pace of production needed to meet customer demand. It is notcycle time. It is the available daily work time, taking into account the shifts worked and makingallowances for planned stoppages (for planned maintenance, team briefings, breaks) divided bythe anticipated daily sales rate or demand (including spare parts) plus any extras such as testparts and anticipated scrap.

Takt Time = Net Available Time per Day / Customer Demand per Day

% lost manufacturing capacityPercentage of lost manufacturing capacity due to e.g. technical problems and/or failures.

Waterused per amount of product manufacturedWater (in m3) used per amount (in e.g. tonne) of product manufactured.

Rate of rejectsMeasures the quality and uniformity of the final product.

Unit costs of the operationsRatio of actual to projected unit production costs.

Inventory Key Performance Indicators

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