Supply Chain KPIs are Essential – The Right Ones!
The information on this page WILL help you get it right.
Many people get really confused about KPIs or Key Performance Indicators in Logistics and Supply Chain operations. Which ones to use?… How many to use?
Sadly it’s not such an easy question to answer.
Of course they need to be SMART. Specific, Measurable, Achievable, Relevant, and Time phased.
But my Take on KPIs is this…
1) Don’t have too many! I’ve literally seen KPI “packs” the size of phone books, and even KPI sets circulated as a monthly magazine… that no one reads. Remember what the K stands for!
2) Make sure they “tie” in with your goals and objectives. Do they directly support those objectives?
Supply Chain KPI Tips
All you need to know about Supply Chain KPIs
So that unfortunately means that many of your supply chain KPIs may not be stock-standard ones. But in Supply Chain you would normally expect to see the following standard set, along with those that are more specific to your business needs.
- DIF – Delivery in Full
- DOT – Delivery on Time
- DIFOT – Delivery In Full on Time
- Cost as a percentage of sales (Logistics or Supply Chain)
- Inventory stock turns in Days.
If you’d like to read more about Supply Chain KPIs, you can download (free) a chapter from one of our Best Selling Books on the topic.
KPIs in Supply Chain – The Basics
As in any business activity, supply chain operations need to focus constantly on improvement to compete in the market place. But how do you know if your supply chain performance is being maintained, or if it’s getting better, or worse?
This is where KPIs come in.
What’s a KPI, Anyway?
KPI stands for Key Performance Indicator, and can be defined as a practical and objective measurement of progress, either:
- Towards a predetermined goal, or
- Against a required standard of performance
It might help to think of a KPI as something like an instrument on a car dashboard—a speedometer for example.
If you are driving your car and you wish to maintain a speed of 50 KPH, you will use your speedometer to maintain that speed. You will drive a little faster if your speedometer needle drops below 50KPH or you will slow down if it climbs above the required speed.
You will use a KPI in the same way as your car’s speedometer. The only difference is that in most cases, you won’t wish to lower performance when a business activity exceeds the required standard. In fact, if your car has a fuel consumption gauge and you use this to try and drive economically, then you are making use of a bona fide KPI.
Why Are KPIs Important?
Using KPIs for performance measurement ensures that you are always evaluating your business activity against a static benchmark. This means that fluctuations are immediately visible and if performance moves in the wrong direction, action can quickly be taken to address the situation.
When a KPI shows that performance is consistently meeting or exceeding the required level, you can decide to raise the bar and set a higher standard to aspire to. For this reason, KPIs are essential for any business improvement strategy.
Apart from an internal desire to improve and compete, KPIs are likely to play a part in attracting and retaining customers.
This is especially true in any business where customers tie into agreements or contracts. Service level agreements in particular will be monitored through KPIs agreed between a business and its customer, with the probability of penalties being applied when performance falls below agreed levels.
In short, KPIs provide visibility of business performance and allow objective quantitative and qualitative evaluation. When aligned with business goals, KPIs take away the guess work and enable focus to be placed on progress towards the goals.
Supply Chain KPIs
When measuring the effectiveness and cost of your supply chain you will need to set up and monitor KPIs which give visibility of cross functional activity as well as those which apply to individual supply chain components.
Later in this article we’ll look at some examples of functional and cross functional KPIs. Broadly speaking though, the following areas are those where KPIs will be necessary:
- Order capture
- Inventory management
- Purchasing and supplier management
Cross functional KPIs are likely to provide snapshots of the following end-to-end performance factors:
- Perfect order (the degree of accuracy to which customers’ requirements are being met)
- Inventory levels
- Stock losses and/or damages
- Gross profit
- Cost of goods sold
- Total logistics cost
Cross functional KPIs should be constructed in such a way that each function can see its contribution towards the overall supply chain performance.
Why Do Companies Have Too Many KPIs?
At the beginning of this article, I stressed the importance of not having too many KPIs. It’s an issue I see again and again in the course of my consulting activity. The most common cause is a state of confusion about what really constitutes a KPI.
Let me try to clarify. A KPI is a metric… but not just any metric. A KPI is a metric focused on a KEY element of business, departmental, or team performance.
There is really nothing wrong with capturing a lot of metrics, especially with today’s powerful analytics software solutions to help. However, it’s beyond realistic to expect anyone to monitor them closely on a day-to-day or even week-to-week basis.
KPIs should comprise a handful of metrics that CAN be realistically monitored and reacted to on a continuous basis. They don’t need to be especially granular, but should instead track the most vital elements of performance.
How Many is Too Many?
Of course, the difference between KPIs and metrics will vary at different levels of your organisation, so for example, while a metric recording “receiving accuracy” in a warehouse would certainly be a KPI for a warehouse manager, it would be completely extraneous as an executive-level KPI.
In determining your supply chain KPI suite then, the important thing is to identify performance elements that are critical to those empowered to impact them, and develop appropriate KPIs for the empowered audience.
At no level in a function, or cross-functionally though, should anyone need to try and monitor more than a few KPIs. Exactly how many is hard to say and will in any case vary from business to business, but frankly, if you are tempted to ask if you have too many KPIs, you probably do.
Need Further Assistance?
Here at Logistics Bureau we have 20 years of experience in assisting clients with Supply Chain Benchmarking, and the development of suitable KPIs. We have benchmarked almost 1,000 Supply Chains!
We can help you:
- Select the right KPIs
- For the right level of management
- Set the right targets for those KPIs
- And assess your current performance
So if you need some assistance, just contact me.
P.S. Let us know your thoughts on KPI’s in the comment box below.
We personally answer all questions.
Some More KPI Related Pages:
At Benchmarking Success. Online KPIs
And on this site:
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Editor’s Note: This post was originally published in May 2013. It has now been revamped and updated with more comprehensive information.