In an attempt to help you keep your supply chain organisation from analysis paralysis, metric manipulation, or measurement misnomers, I decided to use this post to share nine important guidelines, or golden rules, for benchmarking your business and monitoring performance using meaningful supply chain KPIs.
Golden Rule #1: Meaningful KPIs Require a Meaningful Strategy
I’ve written many posts on this blog about the importance of having a supply chain strategy aligned with the overall business plan, and why it is a mistake to have misaligned strategies. I’ve also described some of the issues that can arise from such an error. However, it’s a topic worth touching on again, as an unclear or misaligned supply chain strategy will make it difficult for you to develop meaningful KPIs.
Your supply chain strategy should be the basis for your KPIs, but for that to be possible, the strategy must be clear, understandable, and aligned with the business plan.
With these conditions assured, you should be able to identify (broadly) the areas of measurement that will steer your organisation towards its goals.
Golden Rule #2: Don’t Meddle or Manipulate
If you want meaningful supply chain KPIs, you need to live with the numbers they reveal. I’ve seen more than one management team create or exploit process loopholes to arrive at better KPI results. It’s a folly to do so, and it doesn’t do the managers or the company any favours.
A prime example of this kind of manipulation (and really, it is manipulation), is when performance issues arise which result in shipment delays.
Instead of concentrating on resolving the issues at hand, the management team starts contacting customers and asking if they will accept a later delivery date or time. If the customers agree, the management team dispatches the shipments and records them as delivered on time.
Of course, contacting the customers is the right thing to do, but when it is the shipper and not the customer, who initiates a change in the delivery schedule, there is no way it should be recorded as “on-time delivery.” Late is late, even when it is with a customer’s permission.
Golden Rule #3: Put Yourself on the Outside, Looking In
You can come up with a list of service metrics and call them KPIs, but that doesn’t automatically make them meaningful supply chain KPIs. For them to be useful, your service KPIs should reflect how your customers are likely to perceive performance.
For example, if you offer a three-hour delivery time window, you might consider that to be excellent service. But is it that good if most of your deliveries arrive 15 minutes before the time window closes?
Ask yourself this: Do you think your customers enjoy clock-watching for more than two-and-a-half hours while wondering if their delivery is going to turn up? A more meaningful KPI would measure how many deliveries you execute during the first hour of the customer’s given time window.
Golden Rule #4: Choose Quality Over Quantity
Sometimes, even if you choose and use meaningful supply chain KPIs, you still struggle to identify and address the priority performance issues. That’s a situation that often arises when too many KPIs are in effect—so many that you can’t see the wood for the trees.
It’s a good idea when first establishing supply chain KPIs, to apply the rule of three. That means picking just three measurements to use as KPIs within each supply chain function or component.
Another alternative is to restrict your entire KPI suite to around ten metrics, a practice that will save you and your colleagues from analysis paralysis. Once you are familiar with your KPIs and everyone is comfortable with them, you can always add some more if it makes sense.
Golden Rule #5: Use the Right Language for Stakeholders
Another point that I’ve made in other posts, is that while you will have a single, and hopefully a simple, set of high-level KPIs, you will also need to break those down into smaller components to cascade them to lower levels in your organisation.
Cascading KPIs is essential because your high-level metrics will only be meaningful to stakeholders in your company’s top management tier. They won’t be of much use in performance management without support from lower-level KPIs comprehensible to middle managers, supervisors, and functional teams.
Therefore, you should develop these supporting KPIs with an appropriate degree of granularity for each tier of stakeholders in your supply chain organization. Furthermore, you should present them in the right language for each stakeholder group and using the most appropriate instrument.
Golden Rule #6: Choose the Right Method of Presentation
Further to the points made in Rule #5, it’s essential to understand that for KPIs to be meaningful to everybody in your organisation, how they look and read to individual stakeholder groups and how you present the numbers matter a great deal.
For example, a lengthy printed or emailed KPI report is hard enough even for executives to engage with, let alone for operational teams that spend most of their time focused on delivering the results.
Try to find presentation methods that make your KPIs easy to access, visualise, and assimilate. You could try using:
- Digital dashboards customized for each type of audience
- Wall-mounted, scrolling LED displays
- A more interactive method, such as short KPI briefings that allow team members to ask questions and make suggestions to improve the numbers.
Golden Rule #7: The Most Meaningful KPIs are Rarely Off-the-Shelf
Don’t get me wrong here; off-the-shelf KPIs can serve a useful purpose, for example, when used for external benchmarking exercises. They can give you an accurate portrayal of how your supply chain compares with competitors or with peers in your industry. They can also be an excellent source of guidance to get started with meaningful KPI measurements.
However, when it comes to implementing the KPIs you will use to measure your operation, it may not be wise to take the path of least resistance and select from a range of standard measurements used in the industry. After all, it is unlikely that your supply chain components work in the same way as those in another enterprise.
Of course, some “standard” KPIs might fit flawlessly. Others will need some tweaking to represent your organisation’s performance faithfully, and you may even need a unique KPI or two if you are to drive behaviours that help you meet your company’s goals.
Golden Rule #8: A Meaningful KPI Has an Owner
In Rule # 5, I mentioned the need to tailor KPIs to specific stakeholder groups. However, no group is likely to benefit from access to performance measurements without an owner.
Group ownership is not a workable option, since if you have more than one person responsible for a KPI, the reality is that nobody is responsible.
For your KPIs to be meaningful and hence successful, you need to assign responsibility at each level to the one person best placed to interpret them, make decisions based on what he or she finds, and take any action necessary to drive improvement.
That said, under some circumstances, a KPI (or set of KPIs) can have two owners because the person assigned to monitor them may not be the same person responsible for collecting the data. While automated KPI data capture is increasingly common, you might still require some human intervention. Here too, it is essential to determine who will own the task.
Golden Rule #9: A KPI May Not Be Meaningful Forever
In supply chain management, change is the only constant. Over time, your business and supply chain strategies will change, and when that happens, some of your KPIs may need to change too.
Even seemingly subtle changes in your supply chain and logistics processes may make a difference to your measurements’ relevance and accuracy. To stay on top of the impact of such changes, you should conduct reviews every so often to make sure that all your KPIs are still meaningful. A metric that might have been perfectly fit-for-purpose last year, may have degraded in value to the point of being mere noise today.
Ideally, you should revisit your measurements at least once per year or, if changes in your operation tend to be frequent, perhaps even every six months. Besides these regular reviews, you should also take a fresh look at your KPIs in the immediate aftermath of any significant change project or event.
Golden Rule #10: Meaningful Means Actionable
Another mistake I’ve seen companies make is to have KPIs measuring performance elements upon which they don’t have the power to act. Of course, in such a case, it doesn’t necessarily mean that the KPI is inappropriate as a measurement. Most often, KPIs are not actionable because the company hasn’t developed the means to act.
Take a look at the KPIs you have in place right now for your company. Can you see any which, if you’re honest, would be significantly challenging for your people to address effectively?
If so, you might either wish to:
- a) Downgrade the metric and exclude it as a KPI while continuing to monitor it.
- b) Think seriously about removing the barriers that would stop you from acting on the results.
Golden Rule #11: KPIs Must Not Compete
As each of your KPIs should support the maintenance or improvement of a particular area of performance, any metric that counters another should be a cause for concern. That’s another good reason not to have too many KPIs, because it can become challenging to see if conflicts exist amongst them.
Implementing counteractive KPIs is an easy mistake to make, especially in larger companies with distinct functional areas.
For example, let’s assume the company’s strategy includes an objective for increased productivity. There are many KPIs that can help to drive performance towards that goal. Your logistics team might decide on a KPI to monitor (and increase) the number of cases picked per hour in the warehouse. Meanwhile, your health and safety department might choose to tackle productivity by tracking (and reducing) the number of days lost to injury or sickness.
Both targets are valid and aligned with the company’s objective. However, they can also drive results that conflict, and hence frustrate efforts to meet it.
How KPIs Can Be Counterproductive—Literally!
To drive productivity up, perhaps the warehouse workforce will be encouraged to work faster—through incentives, for example. However, in turn, that may lead to an increase in sprains, strains, and other injuries associated with manual handling of materials—and more, rather than fewer, days lost to injury and sickness.
Similarly, the health and safety element might, quite rightly, become the primary focus. If that involves implementing new working practices, care should be taken not to make some processes more burdensome or less efficient, either of which might reduce pick rates to the detriment of overall productivity.
The example I’ve used might be extreme, and I certainly don’t advocate pitting productivity against health and safety. However, it serves to make the point that without careful planning and scrutiny of details, it’s easy to implement KPIs that inadvertently counteract one another—and that’s a mistake to try and avoid wherever possible.
That’s it … eleven vital things to remember that really will make a difference between metrics masquerading as indicators of performance and the real McCoy—meaningful supply chain KPIs. To summarise them briefly:
- Don’t play around to make the numbers fit
- Use service metrics that reflect how your customers would see your performance
- Don’t try to do too much, with too many KPIs, too soon
- Make sure your KPIs support your supply chain strategy and objectives
- Be sure you implement KPIs that are easy to understand at all levels in your organisation
- Take care to present KPIs in a way that engages stakeholders
- Before using off-the-shelf KPIs, evaluate whether they are a fit for your operation
- Assign individuals as KPI owners
- Review metrics regularly to check if they remain an appropriate reflection of performance
- Make sure your teams can act on the results of every KPI
- Avoid implementing KPIs that conflict or compete with one another
If you’ve had any remarkable experiences developing KPIs for your own supply chain organization, or you have some tips you would like to share for meaningful KPIs, please don’t hold back. Feel free to contribute in the comments section below. Your feedback and comments are always very welcome here at Logistics Bureau.
Editor’s Note: This post was originally published in September 2015, under the title “3 Golden Rules for Meaningful Supply Chain KPIs”. It has since been revamped and extended with extra sections to make the information more comprehensive. The most recent updates were made in October 2020.