The 5 Key – Performance Measurement
So in Part 1 we looked at balancing the customer and stakeholder needs.
In Part 2, we looked at Supply Chain Strategy.
In Part 3 we looked at flow.
And in Part 4 we looked at Key Drivers.
And now in this final part, Part 5, we take a look at Performance Measurement.
Over the years I have been lucky enough to work with hundreds of companies in dozens of countries. And very few of them had what I would regard as an effective performance measurement regime in place.
Often I would be confronted with a set of monthly KPIs that resembled a phone book! For those who have never seen or used one, it looks like this! An ingenious ‘information’ product that used to list the phone numbers of everyone in a given district…..printed on paper. No… don’t laugh. They were.
There are three things I would suggest you ‘take on board’ regarding measuring Supply Chain performance.
- Use KPIs (Key Performance Indicators) that directly support your business objectives.
- Only use a small number of KPIs that really matter. The key is in the K!
- And forget all you ever learnt about higher service levels costing more!
What to Measure?
If you have Business plans or Supply Chain plans that you can gain access to, do. What are they key objectives of those plans?
In selecting which KPIs to use, make sure that at the highest level of usage, they directly measure inputs to those objectives. And nothing else…
Then at each level down in the organisation, they need to feed ‘upwards’.
Let me explain with a simple example.
We’ll assume a business objective and hence a Supply Chain objective too, is to minimise costs. So one of our Supply Chain objectives might be phrased as:
Minimise Supply Chain Costs. Not very imaginative I grant you. But it’ll work for our example.
OK, if we had to measure 3 or 4 things that would have a direct impact on minimising Supply chain costs, what would they be? Maybe:
- End to end storage and freight costs. (Note I have not sub optimised at this stage by just measuring storage or freight)
- Procurement costs. Maybe measuring procurement cost / unit?
- Order processing costs. To include processing returns.
So there we have 3. At the next level down in the organisation, we might pick another 3 in more detail. For example to measure the inputs to procurements costs we might measure:
- Procurement labour cost per purchase order.
- Unit cost per item purchased.
- Total procurement cost per unit
Get the idea? We start at the top with maybe just 3 or 4 KPIs. That directly support our objectives. Then each time we step down through a tier of management in the organisation, we repeat the process. So when we get to the warehouse manager, we might be measuring cost per unit throughput, labour hours per order, overtime and so on. That’s OK for this level of management, but not at the top levels. The secret here is to make KPIs relevant for the level of management using them.
Here is an example of the cascading nature of a KPI ‘tree’. In this example we are looking at 2 key objectives. High product availability (on shelf availability), and low costs (Supply Chain cost as a % of sales)
So we have 2 measures, that then drop down to 4 and 5 measures, and one of those, drops down to 9 very detailed measures.
But they all start at the top… and support each other
Some Common KPIs
Here are a very common set of KPIs that might be used at the more operational level of an organisation.
These are taken from our Benchmarking database and represent a sample of ‘distributors’.
The good band shows the performance of the top 20%, the average band, the middle 50% and the Low band the bottom 30%.
Cost v Service
And now let me challenge your thinking on the cost v service balance. We are all taught when we learn Supply Chain, that as we increase service levels so the cost increases.
And we learn to pay more for higher service. If we want a better meal, we pay more. A better seat on the plane, we pay more. So it should be the same in Supply Chain shouldn’t it? As customer service levels improve, so costs get higher? WRONG.
Here is a sample from our Benchmarking database.
It shows for 6 industry groups, the top performers (Best in Class – top 10%) in terms of customer service
It then measures the Supply Chain Cost as a Percentage of Sales for those Best in Class organisations, against the ‘average’ or middle 50% in each industry.
And in all cases… ALL cases, across ALL industries, the organisations providing the best service, do so at half the cost of the average organisations.
So how can that be? We asked them. And the answers were all the same.
We get it right the first time, every time. “we don’t make many mistakes so there is less rework, less returns, less expediting etc.”
We focus on the detail. “costs become readily apparent when you have a passion for service excellence. You can’t look at one without unavoidably looking at the other”.
The price/service relationship. (the best bit) “because our service is consistently superior and our customers know it and rely on it, we both increased our market share, and also could afford to charge more than our competitors.” And so the gap widens…
The Perfect Order.
The last thing I will mention is probably the best KPI you could possibly use for customer service. Because it’s cross functional and gets everyone pulling in the same direction.
It’s called the probability of a perfect order.
Here it is:
Note how this measure ‘isolates’ each of the key functions that have an influence on the perfect order probability.
Also note, and this is important, that each measure is multiplied out as we go. So a failure on any one measure impacts the final result.
So in this case the organisation had a probability of a perfect order of only 64%. The average in their industry was 68% and the best in class performance was 93%. So they had a long way to catch up. But they did catch up, over a two year period, by focussing first on the areas of greatest performance gap as highlighted in the chart above.
Summary
Well I hope that has given you some points to think about when trying to measure the performance of your own Supply Chain.
And remember those three key points I made at the top.
- Use KPIs (Key Performance Indicators) that directly support your business objectives.
- Only use a small number of KPIs that really matter. The key is in the K!
- And forget all you ever learnt about higher service levels costing more!
I hope you find this information of value. Feel free to let me know what tips you would like to hear about in our future Bulletins.
