Measuring performance is a critical part of closing the feedback loop for fine-tuning any business's supply chain operation in the long run. Understanding performance and taking tangible steps to improve them helps decrease operational complexity and improve supply chain agility. Companies use various supply chain KPIs to enable them to understand the operation. For virtually any process, the primary focus areas are forecasting accuracy, cost, inventory turnover rate and control, and customer service levels, amongst others.

To truly realize these KPIs’ effectiveness in any supply chain process, these companies need to focus on how they interlink, how to establish a hierarchy, what to diagnose and do an effective RCA, and the tools necessary for improvement.

This article explores all these aspects, giving you a comprehensive roadmap for elevating the effectiveness of your supply chain.

The Pyramid Approach to Key Performance Indicators Management

A structured approach to managing supply chain key performance indicators (KPIs) is essential to achieving these goals. The pyramid model by Gartner, illustrated in the image, offers a strategic framework for diagnosing, assessing, and correcting supply chain metrics to drive optimal outcomes.

Understanding the Pyramid: Layers and Their Significance

The pyramid model represents a structured approach to supply chain KPI management. It is divided into three distinct layers: Functional Metrics, End-to-End Supply Chain Metrics, and Executive Dashboards.

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*How to Improve Supply Chain KPIs: A Practical Guide*

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Each layer plays a vital role in the overall health of the supply chain, helping organizations diagnose issues, assess performance, and take corrective actions. Let's understand them one by one.

1. Functional Metrics: The Foundation of the Pyramid

At the base of this pyramid are the KPIs, which are called Functional Metrics. These are detailed, day-to-day operational KPIs that provide insight into specific aspects of the supply chain. Monitoring these metrics can help identify issues such as excess inventory, which can tie up cash and negatively affect working capital. These KPIs are really important for identifying the issues, and here are some examples:

Supplier Quality: Measures the quality of materials supplied, which directly impacts production efficiency and product quality.
Order Cycle Time: Tracks the time to fulfill an order from receipt to delivery.

Functional metrics are essential for identifying the root causes (RCA) of operations problems. By actively monitoring these KPIs, companies can identify specific areas where performance isn’t up to the mark. This provides a clear target out of many opportunities for driving improvements.

2. End-to-End Supply Chain Metrics: Diagnosing and Aligning

The middle layer of the pyramid is the End-to-End Supply Chain Metrics. These metrics provide a much broader view of the complete supply chain. Metrics such as average inventory and inventory turnover rate provide insights into a business's efficiency in converting inventory into sales. It helps by connecting the dots between different functional areas. Key metrics in this layer include:

Inventory Total is the total value of all inventory in the supply chain, including RM/PM, WIP, and finished goods.
Cash-to-Cash Cycle: The C2C Cycle calculates the time between the money invested in inventory to cash flow from sales, freeing up that investment.
Perfect Order (OTIF—On Time In Full): OTIF is a key indicator of customer satisfaction, measured by the percentage of orders delivered on time and in full. This measure is usually at the line level of the order.

End-to-end metrics help diagnose how well the supply chain functions as a whole. They bridge the gap between operational efficiency and strategic objectives.

3. Executive Dashboards: Decision Making

The Executive Dashboard is the pyramid's top layer and plays an extremely special role. These important KPIs are intended to summarize the supply chain performance of the senior leadership (including commercial leaders and CxOs). These are designed for strategic decision-making. Examples of metrics at this level include:

Demand Forecast Accuracy: Measures the accuracy of customer demand predictions, which is critical for effective planning and inventory management.
Supply Chain Costs: Tracks the total cost associated with managing the supply chain, including procurement, logistics, and inventory holding costs.

Executive dashboards filter complex data into actionable insights for the leadership. This helps senior leaders to make data-backed decisions and then track them over the long term to ensure success.

Expanding the Pyramid: Integrating Strategic Priorities with Supply Chain KPI Management

In exploring the pyramid model for supply chain KPI management, we've discussed how KPIs are layered to diagnose, assess, correct, and measure supply chain performance issues. The next image (Picture 2) is more strategic in nature. It highlights the value of aligning supply chain metrics with broader business objectives.

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The extended model introduces a vertical alignment that connects strategic business priorities to specific supply chain and functional metrics, ultimately leading to targeted diagnostic and process improvements. Let's break down this integration and how it enhances the effectiveness of the supply chain KPI management process.

1. Strategic Priorities: The Guiding Force

At the top of this framework are Strategic Priorities, which represent the organization's overarching goals. These include:

Customer Experience and Value
Agility, Resilience, and Risk Management
Profitable Growth and Return on Investment
Safe and Compliant Operations
Sustainability and Corporate Responsibility
People Management
Strategic and Continuous Improvement Initiatives

These priorities set the organization's direction, guiding decisions and actions across all departments, including supply chain management.

Strategic priorities ensure that the efforts to improve supply chain performance are aligned with the company's long-term goals. For instance, if customer experience is a top priority, the supply chain must focus on metrics that enhance service delivery and customer satisfaction.

2. Business Objectives and Metrics: Translating Strategy into Action

The next layer in the model focuses on Business Objectives and Metrics. These key performance indicators measure the organization's success in achieving its strategic priorities. Examples include:

Revenue and Customer Satisfaction for Customer Experience
Profit for Agility and Resilience
Return on Investment (ROI) for Profitable Growth
Health and Safety for Compliance

Business objectives turn strategic priorities into quantifiable results. Organizations can show that their supply chain techniques drive company results by connecting these goals to supply chain metrics.

3. Supply Chain Objectives and Metrics: Bridging Strategy and Operations

Supply Chain (SC) Objectives and Metrics bridge business objectives and the functional metrics that drive day-to-day operations. Supply chain performance refers to the effectiveness across various stages of the supply chain, including on-time delivery, stock availability, and order accuracy. Key supply chain metrics include:

Service Delivery: Ensuring that products are delivered to customers as promised.
Cost: Managing the overall cost of the supply chain to maintain profitability.
Cash Assets: Optimizing inventory and working capital to improve cash flow.

Supply chain KPIs present a consolidated view of the supply chain relation to business objectives. For instance, how cost reduction while delivering high service levels translates directly to profitability and customer satisfaction targets.

4. Functional Objectives and Metrics: Operational Execution

At the operational level, Functional Objectives and Metrics come into play. These metrics are tied to specific supply chain activities and based on the popular SCOR model:

Plan: Forecast accuracy and production planning efficiency.
Source: Supplier performance, procurement costs.
Make: Production efficiency, quality control.
Deliver: On-time delivery and transportation costs.

Functional metrics are where the rubber meets the road. These KPIs monitor the execution of specific supply chain functions, ensuring daily operations align with supply chain and business objectives. By tracking and improving these metrics, companies can drive supply chain efficiency and effectiveness at the ground level.

5. Diagnostic and Process Metrics: Root-Cause Analysis and Corrective Action

The final layer involves Diagnostic and Process Metrics, which focus on identifying and correcting supply chain performance issues. This layer emphasizes:

Root-Cause Analysis: Leveraging supply chain analytics solutions to identify the underlying causes of performance issues.
Corrective Action: Implementing changes to address these issues and prevent recurrence.

Diagnostic and process metrics are necessary for achieving continuous improvement in any supply chain. By performing a systematic RCA of performance gaps and taking timely corrective action, businesses can maintain or increase overall supply chain performance while also being able to adapt to changes in a competitive environment.

Empowering Strategic Success Through Holocene's Supply Chain Solutions

Improving supply chain KPIs requires a structured, data-driven approach. The pyramid model offers this approach to optimize supply chain performance strategically. But optimizing supply chain performance is not just about tracking metrics — it's about aligning every aspect of your operations with strategic goals to drive sustainable success. The comprehensive framework we've explored shows how integrated KPI management can elevate your supply chain to new heights.

At Holocene, we believe in connecting people and processes with supply chains through cutting-edge technology. Our solutions automate routine tasks, allowing your team to focus on the big-picture, strategic decisions that truly matter. By enhancing the customer experience, driving growth, and unlocking value, Holocene empowers your organization to achieve supply chain excellence and thrive in today's dynamic market.

Connect with us today to see the difference.

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