Supply Chain Management: An International Journal

Developing key performance indicators for supply chain: an industry perspective

Bongsug (Kevin) Chae,
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 Insight from industry

Developing key performance indicators for

supply chain: an industry perspective
Bongsug (Kevin) Chae
Kansas State University, Manhattan, Kansas, USA

Abstract
Purpose – Measuring or monitoring supply chain performance reveals the gap between planning and execution and helps companies to identify
potential problems and areas for improvement. However, it is recognized that developing key performance indicators (KPIs), or metrics, is very
challenging and a set of practical guidelines is not readily available for companies and supply chain management (SCM) practitioners. This paper seeks
to offer a practical approach to performance measurement and to present a list of essential KPIs.
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Design/methodology/approach – This paper offers insights from industry in the area of supply chain performance measurement and a practical
approach to developing performance metrics.
Findings – The experience from, and the review of, industry standards and best practices in supply chain performance measurement suggest that “less
is better” as to developing performance metrics. Companies should focus on only a small list of KPIs which are critical for their operations management,
customer service, and financial viability. Potential KPIs should be developed for each of the supply chain operations-reference (SCOR) model’s four
meta-processes (plan, source, make, and delivery) and need to be hierarchically grouped such as primary and secondary metrics.
Practical implications – The paper offers a background of why performance measurement is necessary for SCM success, pragmatic guidelines for
designing and implementing performance metrics, and critical KPIs with the definition, examples, and computation mechanism.
Originality/value – Despite the importance of performance measurement for successful SCM, many companies wonder how to put performance
metrics in place and make them work in practice. This paper offers an industry-oriented, practical approach to performance measurement in SCM
contexts and proposes key performance metrics which can be easily adapted for different businesses.

Keywords Supply chain management, Performance measurement (quality), Quality indicators

Paper type Viewpoint

Introduction Despite its importance, however, putting performance

The success of supply chain management (SCM) depends on,
among other things, the closed-loop of planning and
execution in regard to the process of minimizing possible
gaps between planning and execution. In practice, it is
impossible to remove such gaps entirely from one’s supply
chain. This is because the future cannot be fully known and
decision-makers develop various operational plans under high
uncertainty. Those in industry recognize this critical in
operation and production planning (Vollmann et al., 2005).
Thus, monitoring how planning and execution are
synchronized is critical for operational performance and
SCM success. In this regard, SCM performance
measurement or monitoring is the term for a set of metrics
and processes related to assessing and evaluating how
accurate the planning is and how well the execution is
carried out.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-8546.htm
Supply Chain Management: An International Journal
14/6 (2009) 422– 428
q Emerald Group Publishing Limited [ISSN 1359-8546]
[DOI 10.1108/13598540910995192]
measurement in place has always been a daunting task.
Because of such reasons as the lack of incentives and top
management support as well as an organizational culture
unfavorable to performance measurement, developing a
performance measurement tool set (also known as key
performance indicators (KPIs) or metrics) involves a rather
complicated process and can be very challenging for ordinary
businesses (see Shepherd and Gunter, 2006; Aramyan et al.,
2007; Lambert and Pohlen, 2001; Lapide, 2000; Chan and
Qi, 2003). A typical firm already has a certain number of
KPIs such as return on investment for assessing its financial
performance, but supply chain related KPIs have not been
widely adopted and businesses are typically uninformed of
them. Companies often find that there is a lack of practical
guidelines on how to develop KPIs. This seems to be in
contrast to the fast adoption of various SCM related
technologies and other best practices for the past decade.
We respond to this need by offering practical guidelines for
developing metrics and proposing a list of metrics which are
essential for a firm’s operations management, customer
service, and financial viability. The paper also explains the
importance of defining roles and responsibilities (R&R) of
organizational units and members to make KPIs work in
practice. The next section first sketches the process of SCM
planning and execution and positions performance
measurements in this context.

422
 Developing KPIs for supply chain: an industry perspective
Bongsug (Kevin) Chae
Supply chain planning and execution
SCM planning takes supply and demand information and
generates a synchronized sales and production plan. SCM
execution takes this enterprise-level plan and carries out such
activities as source, production, and delivery, which ultimately
generate revenues. More specifically, the planning covers
demand management (DM) and master production planning
(MPP). Most companies use software for planning.
Depending on the complexity of the planning, the range of
software being used is very broad: from spreadsheets to
advanced planning and scheduling (APS) from software
vendors like SAP, i2, and Oracle. DM offers forecast and sales
orders to MPP. MPP uses the demand information and
generates monthly, weekly, and daily master production plans,
considering production capacity and raw material availability.
Also, MPP can be designed to produce such outputs as
available-to-promise (ATP) for the sales/marketing unit,
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production quantities for the manufacturing unit, and
material purchasing plan for the purchasing unit. Then,
SCM execution follows. Upon availability of the information
from the planning stage, business units either take action or
execute the MPP. To illustrate, the sales unit offers delivery
promising to customers, the production unit manufactures
the targeted amount of products, and the purchasing unit
releases purchase orders (PO) to suppliers for material
sourcing. Likewise, various types of software, ranging from
spreadsheet to advanced execution tools such as warehouse
management and logistics system, are available (Figure 1).
There is always a time gap between the planning and
execution and unexpected events often occur during the
execution. As a consequence, there is always a gap between
what was planned and what is actually done. But, for higher
SCM performance companies and their members need to
make continuous efforts (or adaptations) to close the gap.
Performance metrics or KPIs offer the overall visibility of
supply chain and help to assess the accuracy of supply/
demand plan (e.g. forecast accuracy), and the execution
performance (e.g. actual sales versus forecast plan). KPIs
reveal the gap between plan and execution and offer
opportunities to identify and correct potential problems.
From a systems perspective, feedback is necessary for every
system or organism’s survival. Performance measurement or
monitoring plays the role of feedback in one’s supply chain.
Figure 1 Supply chain planning and execution
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Supply Chain Management: An International Journal
Volume 14 · Number 6 · 2009 · 422 –428
Developing performance measurement: general
guidelines
Most companies without APS or other advanced SCM
software in place typically do not have a formal method of
monitoring their SCM performance. In this situation the
review and discussion of performance metrics are not on the
agenda of monthly and weekly sales and operations planning
(S&OP). Some companies have very little understanding of
how to define KPIs for their supply/demand chain and set up
the structure of people’s roles and responsibilities relevant to
performance measurement. One particular framework – the
Supply Chain Operations-Reference (SCOR) model –
becomes useful as it comes to develop supply chain
performance metrics. According to the model, a company’s
supply chain would be represented by four meta-level
processes: plan, source, production, and delivery. In
practice, this high-level view of SCM processes can be
useful for identifying potential KPIs. Figure 2 shows such
metrics. For example, monitoring the “plan-related”
processes would need such metrics as forecast accuracy and
MPP cycle time.
However, developing key metrics becomes a daunting task,
considering that listing potential supply chain related KPIs
itself appears to be inexhaustible (Lapide, 2000; Hoffman,
2004; Gunasekaran et al., 2001; Shepherd and Gunter,
2006). For example, an AMR research report contains about
45 supply chain KPIs, a report from ASCET lists almost 100
KPIs, and academic papers also suggest a large number of
KPIs. Choosing the right number of key KPIs is a challenge to
many companies (Lapide, 2006). Unlike a general perception
that more is better, in supply chain performance measurement
“less is better”: companies should start with a small number
of KPIs which are absolutely necessary to monitor the meta-
level processes (plan, source, make, and delivery) which they
can successfully manage and operate.
In addition, companies can benefit from having those
selected KPIs layered or hierarchically organized. There are
several possible approaches. One ways is to hierarchically
group KPIs as top tier, mid-level, and ground level, as
suggested by AMR (Hofman, 2004). The top-tier metrics,
such as demand forecast accuracy, show a high-level view of
how a company’s overall supply chain is doing. The other two
lower-level metrics that are connected to the top-tier metrics
are designed to diagnose detailed reasons for
underperformance of the top-tier metrics. Another way is
 Developing KPIs for supply chain: an industry perspective
Bongsug (Kevin) Chae
Figure 2 Exemplar supply chain KPIs
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through three levels – strategic (e.g. total cycle time), tactical
(e.g. delivery reliability), and operational (e.g. capacity
utilization) – which can be best dealt with by the
appropriate management level (Gunasekaran et al. 2001).
For easy and fast implementation, we recommend two layers
– primary and secondary. The primary metrics (e.g. forecast
accuracy, on time delivery) represent a company’s overall
supply chain performance, which should be regularly
monitored by the top management and the middle
management responsible for demand and supply
management. The secondary metrics are potential indicators
of why the primary metrics are high or low and offer a detailed
view of supply chain.
Proposed KPIs
The metrics presented here adopt the SCOR model’s four
meta-level processes and are grouped hierarchically as
primary and secondary KPIs. Also, the key assumption is
that a company’s supply chain relies on both forecasting and
order information, rather than order only, meaning that both
push-based and pull-based planning are likely present. In
today’s typical manufacturing setting, where sales and
production activities are globally operated, one’s supply
chain most likely needs forecasting as well as order
information in order for advanced sourcing of raw materials
and inventory management (see Figure 3).
Planning
Planning is a vitally important aspect of all activities of supply
chain, including source, make, and delivery. From a
performance standpoint, in particular, it is important to
monitor the activities such as demand forecasting, planning
cycle of MPP and S&OP, and inventory and distribution
requirement planning.
Primary – forecast accuracy
The role of forecasting in a supply chain is well known (Moon
et al., 2000). Generally, supply chain planning relies on
forecast data, which becomes the basis for its production,
material sourcing, inventory management, and all other
activities in one’s supply chain. There are two primary ways of
forecasting future demand. One is to use extant forecasting
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Supply Chain Management: An International Journal
Volume 14 · Number 6 · 2009 · 422 –428
methods/techniques such as moving average and simple
exponential smoothing. This approach relies on historical
data and mathematical models, which are often available
through APS. The other approach regularly takes demand
forecasting data from salespeople (or units) who may (or may
not) utilize the mathematical forecasting models and receive
sales and demand information from customers. Recently,
more companies are adopting “consensus forecasting” in
which forecasting is done “collaboratively” among different
groups of people ranging from salespeople to business or sales
managers and, as a result, a single number forecasting is
available for MPP. Forecast accuracy can be computed by
min. (amount of sales, amount of forecasting)/max. (amount
of sales, amount of forecasting) per each sales person, each
sales subsidiary, each product, and each product category.
Primary – planning cycle time
Today there is increasing pressure to make planning cycle
time as short as possible, from monthly and quarterly to
weekly (and even daily). This need comes partly from fast-
changing external environments (e.g. shorter product life
cycle), demand of better customer service, and high
uncertainty in supply chain. In general, companies well
known for their advanced supply chain capabilities tend to
have a shorter planning cycle time than others. Short planning
cycle time would be a good indicator of fast responsiveness
and high adaptability of supply chain. For this reason, short
planning cycle time is much desirable. To measure planning
cycle time, it is necessary to figure out how regularly S&OP is
being performed. In the 1980s when the practice began, most
companies had quarterly or monthly S&OP meetings for
balancing demand and supply. This generally meant that
forecasting data was collected and formally reviewed quarterly
or monthly and then production and material purchase plans
followed. In this case, planning cycle time is considered to be
a month or a quarter. On the other hand, more high-
performance companies today are conducting S&OP on a
weekly basis (or more often). As a result, the planning cycle
time becomes shorter.
Primary – total inventory days of supply (TIDS)
TIDS has been considered one of the most important KPIs by
companies for the past several decades. In the past the goal
had been to minimize the amount of inventories within a
 Developing KPIs for supply chain: an industry perspective
Bongsug (Kevin) Chae
Figure 3 Proposed supply chain metrics
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company. But now the effort is to minimize total inventories
within one’s supply chain network. There are several methods
for computing TIDS. One general approach is to divide the
dollar value of total finished goods for a particular month by
the daily average of costs of goods sold ( ¼ the month’s costs
of goods sold divided by 30 days). The inventory days of raw
materials can be similarly computed and added to the
inventory days of finished goods for TIDS ( ¼ days of finished
goods þ days of raw materials). The frequency of calculating
TIDS varies among the companies. Traditionally, the
computation was done for the yearly TIDS but now the
monthly TIDS is much desirable.
Primary – cash-to-cash cycle time (CCCT)
CCCI is widely used to figure out the financial efficiency of a
supply chain. As a composite metric it is expected to offer a
comprehensive view of one’s supply chain (Vollmann et al.,
2005). CCCT is the amount of time a company takes to
recover its financial investment for purchasing. It can be
computed according to an equation (inventory days þ days of
account receivable 2 days of account payable); the shorter the
CCCT, the more working capital available. Some companies
such as Dell are known to have a negative CCCT. In order for
a short CCCT, it is necessary to alleviate the overall inventory
level while extending days of account payable and reducing
days of account receivable (see Farris and Hutchison, 2002)
Secondary – forecast volatility
Demand forecast should reflect real customer demands as
much as possible and deliver accurate market information to
the upstream supply chain (e.g. production and sourcing).
However, the behavior of salespeople characterized by
forecast volatility, known as the degree of changing
forecasting amount weekly, can result in serious challenges
to production and material sourcing. For example,
salespeople of a consumer electronics company may be
expected to enter forecasting amounts per product and per
customer into DM system. A common practice is that each
week salespeople make predictions for the eight to 16-week
rolling period. In the first week, a salesperson predicted to sell
200 units of Product No. 1 to customer A in the eighth week.
However, in the second or later week he may change that
forecast amount to 50 and in the sixth or seventh week he may
increase his forecast from 50 to 300. While these forecasting
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Supply Chain Management: An International Journal
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changes may be due to real changes in market demand, in
practice, this high magnitude of changes in the forecasting
makes it very difficult for the production and purchasing
departments to develop the MPP and MRP. Thus, forecast
volatility needs to be as low as possible for the stability of the
supply chain. The computation can use the method of
standard deviation.
Secondary – forecast vs order
Forecast accuracy, one of the most widely used metrics for
supply chains computed by comparing the amount forecasted
with the amount actually sold. Thus, high forecast accuracy
demands the operational excellence in all four meta-level
processes. For instance, the sale unit predicted 1,000 units of
a major product for the fifth week and brought an order of
1,000 units of the same product for the same week. Thus,
forecast vs order is perfect. However, if the purchasing unit
does not make an accurate amount of raw materials ready for
the 1,000 units, the production and delivery will fail to meet
the sales unit’s original demand. As a result, forecast accuracy
becomes low. Therefore, the synchronization of demand and
supply management plays an important role in forecast
accuracy. For this reason, it is often difficult to evaluate the
sale department/unit through forecasting accuracy. Rather,
forecast vs order is an alternative metric to evaluate the sale
unit. In general, low forecast vs order is a good indicator of
low forecast accuracy. If forecast vs order is high but forecast
accuracy is relatively low, this would be indicating some
potential problems with manufacturing and material
purchasing.
Secondary – days of finished goods at sales subsidiaries and
manufacturing subsidiaries
When sales and manufacturing operation is going global, as it
is in many companies, it is critical to know the inventory level
at each of the subsidiaries that could be used in order to
understand potential problems relevant to the total inventory
days of supply and others.
Secondary – rate of obsolete inventory
Along with days of finished goods at sales subsidiaries, it is
important to measure the obsolete inventory level at each
sales subsidiary. Obsolete inventory generally refers to those
having been at a sales subsidiary for more than a certain
period (e.g. 60 days). These slow moving or excess inventories
 Developing KPIs for supply chain: an industry perspective Supply Chain Management: An International Journal
Bongsug (Kevin) Chae Volume 14 · Number 6 · 2009 · 422 –428

generally mean high inventory carrying cost and the disposal on how well (e.g. on time) manufacturing subsidiaries (or
of such inventories comes as a huge challenge. Overall, factories) and ODM/OEM companies supply products to
obsolete inventories are the main source of increasing the full their sales subsidiaries and/or distributors.
cost of inventory. Regularly monitoring the obsolete inventory
Primary – on time departure from manufacturing subsidiaries and
level allows companies to deal with it in a more proactive way
ODM/OEM
and reduces the overall cost of inventory.
One key KPI in the manufacturing area is the level of on-time
product departure from manufacturing subsidiaries. Each
Source
manufacturing subsidiary is operated with so-called shipment
The sourcing function in the upstream supply chain is
plan. A consumer electronics manufacturer would have a
becoming more important today because there is high
number of its own production facilities in different countries
demand for a supply chain to be more customer-oriented
and at the same time may have one or more original design
and, as a result, the supply chain needs to be adaptable to
manufacturers (ODM) or original equipment manufacturers
market demand. On the other hand, the complexity of
(OEM). This manufacturer generally releases a production
material sourcing is higher than before since companies are
plan for each of its manufacturing facilities, for example on a
adopting global sourcing strategies these days. Supplier
weekly basis, but not to its ODM or OEM. Rather, the
delivery performance should be the primary focus.
company tends to release a shipment plan to both
Primary – supplier fill rate manufacturing facilities and ODM/OEM. Thus, it is
The primary KPI for the sourcing function is supplier fill rate, important to keep track of the performance (plan vs. result)
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which measures a supplier’s reliability in delivering materials. of shipment by each manufacturing subsidiary and ODM/
To properly evaluate this metric, two considerations need to OEM. The computation can be done by dividing the number
be made. First, supplier fill rate must be measured item-by- of shipment cases on time by total number of shipment cases.
item since a purchasing order contains multiple line items.
Secondary – on time production
Second, when a simple way to measure supplier fill rate is for
For better performance of on time departure, on time
one to compare the actual delivery date with the requested
production (OTP) must first take place. OTP is the measure
date of delivery then it is necessary to determine whether a far
of planned production versus actual production. This can be
advanced delivery should also be considered to be a “hit” or
monitored daily, weekly, and monthly. For instance, a
not. A practical approach is incorporating the allowance
company that releases a daily production plan should
period in the computation, considering each line item has a
monitor actual production daily. Since, in most companies,
different order lead time, presumably stored in ERP as the
the production data is available through ERP or
master data. For example, assuming that a line item has its
manufacturing execution systems (MES), the monitoring
order lead-time as 30 days and was scheduled to be delivered
becomes relatively easy. The performance monitoring should
by October 15, but the actual delivery was made on October
target for each manufacturing subsidiary (or factory).
17. The simple approach mentioned earlier would consider
this delivery as late and this lowers the supplier fill rate. But, Secondary – order fill rate
when an allowance period (e.g. 10 percent of the order lead Order fill rate is another relevant metric for evaluating
time) is considered, this particular delivery is counted as a hit. manufacturing performance. There are various ways to
From this approach, a delivery made on October 5 would be measure order fill rate. One general approach is to compare
considered as an imperfect delivery since it was done too customer’s requested date of delivery (RDD) with the date of
early. delivery committed by the company’s order management
system (OMS) which could be part of ERP or APS. Like
Secondary – rate of automatic PO release
supplier fill rate, an allowance of certain days could be
For vendors to satisfy the material needs of their customers, it
considered. For example, a customer places an order with
is necessary for them to receive accurate purchasing
RDD of October 10. If the available to promise (ATP) date
information, including amount of materials, due date, and
generated by ERP or APS is no later than October 17 (for
others in a systematic way. Today material requirement
instance, with the allowance period of seven days), this case is
planning (MRP) system is widely used. In practice, planners
considered a “hit.”
do not review the output of MRP. Instead MRP automatically
releases POs to vendors. Related to this, a system and rule-
Delivery
based approach to MRP has been emphasized due to the
Fast and reliable product delivery is important for customer
increasing complexity of MPP and detailed material planning.
satisfaction and sales. But, as companies are going global, the
In addition, a plan by MRP should be based on a globally
on-time product delivery becomes more complex and
optimized MPP generated such systems as APS and ERP’s
challenging than ever. Suggested below are the metrics
production module, and thus a regular, automatic release of
based on the assumption that a company has a global
purchase orders by MRP to vendors is better for streamlining
operation and, for sales and delivery of products to local
supply chain than the traditional, manual-based release of
customers, maintains sales subsidiaries (or has distributors) in
purchase orders by purchasing personnel. Thus, higher
major countries or regions.
automatic PO release rate is a good indicator of how
systematic the process of raw material purchasing is. Primary – on time departure from sales subsidiary to customers
(OTD)
Make It is often difficult for a manufacturing company to figure out
There are many potential metrics (e.g. capacity utilization, the actual time of arrival (ATA) of its products to end
manufacturing lead time) relevant to the production or customers. While estimated time of arrival (ETA) information
“make” activities. Among them, the key metrics should focus is available since delivery lead time by different transportation

426
 Developing KPIs for supply chain: an industry perspective
Bongsug (Kevin) Chae
mechanisms is managed by information systems (e.g. ERP) as
the master data, the ATA data may not be available. Unlike
world-class retailers (e.g. Best Buy, Dixons Group) that would
collect the ATA data and offer order tracking information to
customers, most manufacturers do not have adequate systems
in place to collect the ATA data from its distribution channels
(retailers, distributors) and/or end customers. Therefore, the
sales subsidiary-level and company-level delivery performance
can be measured by how many ordered items are shipped on
time from sales subsidiaries. This metric should be monitored
as frequently as possible, typically once per week. This periodic
monitoring helps avoid the situation of products being out of
stock at distribution channels and also helps to increase
customer service.
Secondary – on time arrival to sales subsidiary from
manufacturing subsidiary or ODM/OEM
In order to improve on time departure from sales subsidiary
to customers (OTD) and properly evaluate sales subsidiaries
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using that metric, it is necessary to have a record of on time
arrival (OTA) to sales subsidiaries (or distribution centers)
from manufacturing subsidiaries and ODM/OEMs. This
metric is greatly affected by logistics capability and the
accuracy of the logistics-related master data such as
transportation lead-time.
Roles and responsibilities
Finally, for the proposed performance metrics to work
properly, among other things such as systems, master data,
and processes (Yang et al., 2007), the roles and
responsibilities (R&R) of organizational members and units
or teams need to be clearly defined and communicated
enterprise-wide on a regular basis. Table I is an exemplar
R&R chart, showing the link between business units and the
proposed KPIs.
In addition, the targeting level of each KPI should be set
and updated periodically. Also it is necessary to consider a
Table I Roles and responsibilities
Business unit Proposed KPIs
Sales and marketing Forecast versus order
Forecast volatility
Inventory days of supply at sales subsidiaries
Production On time departure from manufacturing
subsidiaries and ODM/OEM
Production plan versus result
Inventory days of (finished goods) supply at
manufacturing subsidiaries
Inventory days of raw material supply
On time arrival to sales subsidiaries (or
distribution centers) from manufacturing
subsidiaries and ODM/OEM
Purchasing Supplier fill rate
Automatic PO rate
Operation strategy Forecast accuracy
Planning cycle
Inventory days of supply
Cash-to-case cycle
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Supply Chain Management: An International Journal
Volume 14 · Number 6 · 2009 · 422 –428
group of cross-functional people (maybe called “Operation
Strategy” or S&OP Team) which leads the S&OP meeting
and oversees the entire supply chain operation, ranging from
demand planning to supply network designs. This cross-
functional group should play the key role in performance
measurement by monitoring the proposed metrics, figuring
out the root causes of issues with low-performing metrics,
communicating with the units and people responsible, and
further developing strategies for continuous improvement and
adaptation.
Conclusion
Every system or organism uses feedback for continuous
learning and adaptation. The role of performance metrics or
KPIs is the feedback in one’s supply chain. Monitoring KPIs
reveals the gap between plan and execution and helps to
identify and correct potential problems and issues. This
paper presented a practical approach to supply chain
performance measurement by offering guidelines for
designing metrics and proposing key metrics for SCOR
model’s four meta-level processes: plan, source, make, and
delivery. The suggested design guidelines and KPIs are
derived from a set of industry standards and best practices in
performance measurement and companies can benefit from
adopting or adjusting them to their specific environments.
For the success of performance metrics, finally, companies
need to nurture organizational infrastructures, particularly
roles and responsibilities (R&R).
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Bongsug (Kevin) Chae Volume 14 · Number 6 · 2009 · 422 –428

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About the author
Bongsug (Kevin) Chae formerly worked in industry and
consulted global manufacturing firms for their supply chain
management, performance measurement, and IT strategy. He
is currently teaching information and operations management
at Kansas State University. Bongsug (Kevin) Chae can be
contacted at: kevinbschae@gmail.com

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

Or visit our web site for further details: www.emeraldinsight.com/reprints

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