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 this may too rudimentary a set of rules to ensure KPIs are really effective. Later in this article, I will suggest some rather more comprehensive guidelines, but for now, aside from applying the SMART acronym, my basic 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
Unfortunately, even these most basic standards imply 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 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 is getting better, or worse?
This is where KPIs come in.
What’s a KPI, Anyway?
KPI stands for Key Performance Indicator. A KPI 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 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 to 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 guesswork 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 that 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:
1. Order capture
2. Inventory management
3. 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. In the course of my consulting activity, I come across this issue repeatedly. 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 nothing essentially wrong with capturing a large number of metrics, especially with today’s powerful analytics software solutions to help. However, it is 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 secret is to identify performance elements critical to those with the power to influence them, and to develop appropriate KPIs for that audience.
At no level in a function, or cross-functionally though, should anyone need to try to 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.
The Importance of Hierarchy
Another reason not to have too many KPIs is the need to apply various levels of detail to each one. Because of this particular necessity, the development of even half a dozen logistics KPIs will actually result in two to three times this number in total… at the very least.
Therefore, as you might imagine, the implementation of many KPIs will soon see your portfolio approaching the volume of the aforementioned telephone directory, resulting in associated difficulties with monitoring and acting on the mass of data generated.
Nevertheless, it is essential to have a hierarchy of KPIs, since, as already mentioned, a level of granularity suitable for one level of management will be either too general, or too detailed, for another. At the same time, it is probably not wise to have too many levels in your hierarchy, two to three being optimal.
The Two-Level Hierarchy
If you wish to keep things as simple as possible, you should find that two levels, or tiers, of logistics KPIs are sufficient. You might call the highest level the “primary tier” and the second level the “secondary tier”.
The primary tier KPIs would be the ones monitored at executive level in your company, and would perhaps include metrics like:
- Logistics costs as percentage of sales
- Inventory turns
- Total inventory days
- Source-to-deliver cycle time (the time from sourcing raw materials to delivery of finished goods)
At the secondary level, you would have KPIs that provide more granularity and highlight the causes of fluctuations in tier 1 metrics. Examples of these secondary KPIs could include:
- Warehouse costs as % of sales
- Transportation costs as % of sales
- Finished goods inventory turns
- Raw materials inventory turns
- Inventory obsolescence
- Work in progress days
- Finished goods days
- Raw materials days
- Inbound delivery in full
- Inbound delivery on time
- Outbound delivery in full
- Outbound delivery on time
- Manufacturing cycle time
The Three-Level Hierarchy
A three-tier KPI solution is a little more complex, with the top two tiers comprising end-to-end supply chain metrics with Tier 2 being more granular than Tier 1. Meanwhile, the third tier can comprise KPIs that show performance at a functional level, and show how each function’s primary activities are contributing to end-to-end performance.
Whether you choose a two or three tier system will depend on the specifics of your company’s business, the company’s size, and other similar factors.
Of course, it’s also possible to add further tiers for even more granularity, but again, the more tiers you have, the more complex your KPI solution will be.
What Makes an Effective KPI Suite?
Earlier, I mentioned that the SMART acronym might be a little too simple to use as a standard for developing KPIs. As a more effective guide, you might wish to apply the following list of golden rules when building up a suite of logistics KPIs for your company:
1. Make sure all KPIs are aligned with the overall business objectives of your company.
2. Ensure that each KPI has an “owner”, whether that is an individual or a group of people.
3. Design each KPI as a leading metric, able to assist with the prediction of performance issues.
4. KPIs should be actionable, providing timely, accurate data that owners can interpret and utilise.
5. Each KPI should be easy for its owners to understand.
6. Each KPI should reinforce and/or balance others.
7. No KPI should contradict or undermine the others.
8. Each KPI should have a target or threshold indicating a minimum-acceptable level of performance.
9. As each KPI is proved stable and effective, it should be reinforced by incentives or compensation.
10. Each KPI should be updateable, as they will lose relevance over time.
The one caveat I would add here, in relation to golden rule #9, is that it’s important to incentivise only behaviours that do not jeopardise health and safety or regulatory compliance, or otherwise put the reputation of your business at risk.
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:
1. Select the right KPIs
2. For the right level of management
3. Set the right targets for those KPIs
4. 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.
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Editor’s Note: This post was originally published in May 2013. It has since been revamped and updated with information that is more comprehensive. The most recent updates were made in September 2018.